Simple legal concepts for trustees dealing with pension benefit misstatements

Robert Tellwright

One of the most frequently asked questions we get from pension scheme trustees is “how should we deal with a member complaint following a benefit misstatement?”  The legal principles are surprisingly simple – the difficulty comes in applying these principles to the member’s particular situation, as each complaint will be unique in one way or another.

One of the most common grounds for complaint is where trustees send a benefit quotation to a member as he approaches retirement, which mistakenly overstates the amount of pension or cash the member is entitled to.  When the member comes to retire and the mistake is realised, the member may need to suddenly adjust his financial arrangements because his benefits will be lower than expected.

Members tend to react to this situation by asking trustees to pay them the level of benefits set out in the overstatement.  However, it would be unusual for a properly-drafted quotation to confer an entitlement on the member, so the starting point for the trustees is that the member is only entitled to benefits which are calculated correctly under the scheme rules. 

The member may, however, be able to seek compensation from the trustees for a “change of position” flowing from the overstatement.  To do this, the member broadly needs to demonstrate three things:

(1) it was reasonable for him to take the overstatement at face value and rely on it in his financial planning.  If the mistake is blindingly obvious (like a decision to play test cricket in Manchester!), the member could be expected to query it with the trustees, before placing any reliance on this.  The Pensions Ombudsman has expressed different views on when it would be reasonable for a member to check an apparent mistake (see Helen Powell’s post: “Incorrect pension benefit statements: let the buyer beware – or not?”  Recently though, the Ombudsman has tended to favour the view that members shouldn’t normally be expected to question the accuracy of benefit quotations. 

(2) the member has, as a matter of fact, relied on the statement.  In other words, he has done something differently to what he would have done, had he received the correct information.  This is quite a tricky test for trustees to apply in practice, and it can involve a bit of digging into the member’s personal and financial circumstances.  For example, if the overstatement is quite small and it  relates to a pension which will not be the main source of the member’s income in retirement, the trustees could possibly form the view that the overstatement was not a material factor in the member’s retirement planning. The same would be true if the complaint related to a member’s decision to retire, and there is evidence to show that the member was likely to have retired in any event.

(3) the member has suffered a financial loss as a result of his reliance.  Again this can be a difficult test depending on the facts, and it can produce arbitrary results.  The classic example is a member who relies on an overstatement of his tax free cash lump sum, and buys non-refundable tickets for a luxury holiday.  The member wouldn’t have done this had he not received the overstatement, and he is out of pocket as a result.  Therefore he could expect to be compensated for this.  If on the other hand the member had spent the money improving his home, or bought an expensive car, for example, the question of loss is less clear cut – have the home improvements added to the value of the member’s property? Can the car be sold so the member returns to the same position as he was beforehand?   What if the member has taken the decision to retire based on the overstatement – must he be compensated for loss of earnings?  

These are the sort of tricky questions trustees need to consider when a member complains about an overstatement.  It is always difficult to second-guess how the Ombudsman would view a particular claim, but if trustees apply these simple principles, ask the right questions and gather the relevant supporting evidence, they are well on their way towards making a robust decision that should stand up to scrutiny if the member takes the dispute further.

Robert Tellwright is an associate 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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  1. Richard Bryant says:

    Useful guidance points. As you say, applying the principles can be quite tricky and one never knows if the Pensions Ombudsman will take the same view! A recent example of this would seem to be the decision reached on the complaint raised by Mrs Wytch against the Pearl Group Staff Pension Scheme (if anyone is interested the Decision can be found on the Pensions Ombudsman’s website ref: PO:528).

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