Pensions and estoppel: what to look out for and what to expect

Mervyn Parry

I sometimes wonder why so many Pensions Ombudsman cases still seem to turn on archaic sounding concepts like “estoppel”.  Several cases crossing my desk recently have raised estoppel issues where benefits have been paid, or quoted, incorrectly. 

Often the member thinks he has been promised something which is more than his entitlement.  How does the Pensions Ombudsman or the courts approach this sort of claim?  What do pension scheme trustees need to look for, and how do you stop the problem cropping up in the first place? 

It’s important to understand whether estoppel is a risk.  Often there are flaws in administrative procedures.  Here’s some examples I’ve seen recently.  One involved the administrators setting up a pension for an ex-spouse under a pension sharing order.  However the pension sharing order was no longer effective because the ex-spouse had remarried. 

Another involved an incorrect cash equivalent transfer value being calculated and provided to a court for divorce purposes.  The benefit had an enormous underpin left over after the member had been reinstated in the scheme following the misselling scandals of the 1990s.  

A third was perhaps a more frequent occurrence: a series of incorrect early retirement quotations resulting from double-counting revaluation and late retirement increase factors.  When the member received a correct quotation at normal pension date it was £20,000 a year lower.  I have also seen a similar instance of administrators quoting an early retirement pension without applying early retirement factors.

Some common patterns tend to emerge, however, which it is worth focusing on.  The start is usually when administrators issue incorrect information to a member.  Sometimes that is repeated so the member receives a series of incorrect statements which can tend to increase his or her expectations.  The problem often comes to light late in the day; perhaps the member is told that the estimate of his pension was too much only at the last minute before retirement, or even some time after his pension has started.

There are some key principles.  The first is that trustees should only pay what members are entitled to under the trust deed and rules.  So if the member is claiming more than he is entitled to under the rules his claim must be based on a legal principle beyond the trust, such as under a contract or estoppel.  Also the courts are reluctant to give a member a “windfall” – something he is not entitled to – just because he was given misleading or incorrect information.

So how does an “estoppel” claim work?  In essence the basis of the claim is that if the member and the trustees have proceeded on a particular basis which turns out to be wrong, such as an incorrect early retirement quotation, that basis should be taken to be correct.  Put another way, the trustees are prevented or “estopped” from saying the basis was wrong.  Often this arises through a misstatement but can arise through a course of conduct.  But to find a misstatement is not enough by itself for a member to win a claim.  The member must have “changed his position” or “relied to his detriment” on the misstatement and suffered loss.  If this were not so there would be lots of members clutching wrong benefit statements and enjoying more than their correct pension entitlements!

So how do trustees know whether a member has changed his position?  Very often they do not know.  They must ask the member to demonstrate how he relied on the incorrect information and show that he would have acted differently if he had been given the correct numbers.  This may not be easy which helps to explain why there are so many Pensions Ombudsman cases in this area!  But here is a simple example.  If a member is overquoted his tax free commutation amount at retirement, and he spends it on a massive party, it will be difficult or impossible for the trustees to recover the overpayment (they are estopped from denying the wrong quotation), but if the member prudently invested it in gilts, he will still have the overpayment and the trustees can recover it.  Oddly it might pay to be imprudent sometimes!

When thinking about the basis on which a member should be compensated I often go back to one of the first Pensions Ombudsman cases in the 1990s where the High Court said this:

“Compensation for negligent misrepresentation (to which the Pensions Ombudsman equated maladministration) should put the Plaintiff in the same position as if the informant had performed his duty and provided correct information – not put him in the position he would have been in if the incorrect information had been correct”.

This is a good starting point for compensation. 

But the real lesson is for trustees to ensure that their, and their administrator’s, procedures are better than they have often been in the past.  A little time spent on auditing your procedures could be well spent.  For example, are there members with special terms, e.g. an earlier normal retirement date?  Are there any cases that need to be referred to the actuary for a special calculation, and is this actually happening? 

Time spent ensuring that all your procedures are up to scratch could save claims and costs later.

 Mervyn Parry is a consultant at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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