28 January 2013 - Post by:Francesca Parnell
Nothing is certain but death and taxes…I always thought this was quite a good proverb before I became a pensions lawyer. But after helping various trustee clients through lump sum death benefits and children’s and dependants’ pensions, I now know that not much is less certain than the distribution of death benefits. Lump sums are the worst: the trustees have to pick who gets the benefit, within certain limits. How far do trustees need to dig to be sure they are picking the right person? Answer: much deeper than many trustees think…
There are essentially two key stages for a lump sum death benefit: (1) decide who is in the frame in the first place and (2) work out who is most worthy.
Who do the pension scheme rules treat as a potential beneficiary? Take the Pensions Ombudsman determination in Ellaway and others. With no will or nomination form available, the trustees decided to pay the death benefits to Mr Ellaway’s fiancée. This was jumping the gun. They might have had good reasons for preferring her over his parents or siblings, but they should have checked first if she was eligible under the scheme rules, which required either financial dependency or for her to be his “common law wife” (i.e. living with him as if husband and wife). Only then should they have weighed up the merits. To do that, the trustees were told they should have got details of the fiancée’s actual financial position and her contribution to the joint household and found out how solid her relationship had been with the member, as well as checking the circumstances of the other potential beneficiaries.
How much information do you need to make your decision about who should be paid the lump sum death benefit? In Crossan, the trustees did a fair few checks, but were still found guilty of maladministration. They had asked potential beneficiaries to complete an “information on relatives” form, asked the member’s partner to answer a financial questionnaire, looked at her joint bank statement with the member and spoke with the member’s manager. However they were criticised for making their decision on limited information. For a 12 year relationship, the partner should’ve been able to produce more paperwork, e.g. joint tenancy documents, electoral roll papers. The trustees had also failed to look into inconsistencies about how long the partner had lived with the member. Given she wasn’t even the informant on the death certificate, warning bells should have rung.
These cases are not far fetched: they underline the need for trustees to fill in all the gaps they practicably can. This means asking the right questions (who are the potential beneficiaries? what were their relationships with the member? what are their current circumstances?). You need to build up a picture of the member’s life when he died and the lives of those who could be eligible to receive the death benefits. Double-check the answers, look into inconsistencies, pull together supporting documentation and record the factors you take into account. Every case has its own nuances and complexities. Do be sensitive: the people you are talking to have been bereaved; but that’s no excuse for making a decision based on insufficient information…
Check out the official guidance: the Pensions Ombudsman’s “How to avoid the Pensions Ombudsman” and the Pensions Regulator’s “Trustee Guidance“. You can also click here for details of another useful Ombudsman decision in the area, this time from the July 2012 edition of our “Pensions in Dispute” client newsletter.
Francesca Parnell is an associate at Allen & Overy LLP.