25 July 2019 - Post by:Caroline Overton
The perennial question of how much information should be given to members pops up to vex employers and trustees from time to time. Generally, it is possible for trustees and employers to steer a careful course between complying with statutory disclosure obligations and avoiding the pitfalls of providing tax or financial advice. This month, however, we have seen a couple of developments in the courts and media which have questioned the extent of this obligation.
Firstly, we saw the publication of a freedom of information request by Royal London which revealed that HMRC does not know, and does not keep records, of how many people it is fining each year for breach of pension tax relief rules. This has raised questions in the media as to whether enough is being done to alert savers to their responsibilities and potential liabilities. Where a choice may result in a significant tax liability, should the member be provided with enough information to be aware of this in advance?
Secondly, on a similar theme, the High Court held that a scheme administrator that was aware of the adverse tax consequences for retirees of being re-employed within a month of retirement, had breached a duty of care by saying that lump sums would be tax-free when they would not. Here, a police authority (which served as both the post-retirement employer and the scheme administrator) did not warn retiring police officers that if they were re-employed in a civilian role within a month of taking retirement from the police force, they would lose their protected pension ages. Consequently, pension or lump sum payments made before the age of 55 would be unauthorised payments, and taxed accordingly. The High Court considered that letters from the police authority to retirees referring to “tax-free” lump sums were so misleading as to amount to negligent misstatement. This was because the police authority knew about the re-employment and should have realised that this would result in the loss of their protected pension ages and the consequential loss of entitlement to a “tax-free” lump sum. The disclaimers included in the letters were insufficient.
Reassuringly for employers, however, the judge specifically determined that the case did not extend to a duty on employers to advise, inform or warn retirees of tax consequences. As such, it does not raise the bar generally on the extent of information provision to members in relation to benefits. However, although the facts of Corsham revolve around a specific practice of employing police officers post-retirement, there may be implications for some private sector employers. Employers should consider whether they are affected by the findings about the liability of the scheme administrator – in some cases, private sector employers are also the scheme administrator. It is also a reminder to take special care around the retirement of employees who benefit from transitional tax protections, or special pensions promises.
There are two take-away points for trustees and employers:
- it is important to be mindful of the information held in relation to scheme members, and where their specific circumstances may be relevant. In this case, a significant proportion of the membership had protected pension ages. It is important to ensure that nothing included in general member communications could be deemed to be misleading in specific cases; and
- secondly, communications should contain broad enough disclaimers that member circumstances may override the general information provided.
Whilst trustees and employers can be reassured that there is no general extension of the duty to provide information, this is certainly an area that trustees and employers should keep under review. Trustees and employers of schemes where there is a practice of re-employment after retirement and members with protected pension ages, or where the employer is also the scheme administrator, should discuss the implications of this decision with their advisers.
Caroline Overton is a Senior Associate at Allen & Overy LLP