Pension overpayments, resulting from mistakes in calculating members’ benefits, have become a fact of life and virtually no administrative system is fool proof in preventing them.
There can be many reasons why a mistake happens. Reasons can include using the wrong data, incorrect scheme records, misinterpretation of scheme rules, or failure to update administrative procedures in line with scheme changes and mistakes in the administration.
Sometimes a mistake can run for years before it is discovered - as was the case with five public service pension schemes a few years ago. The government announced that incorrect payments had been made in connection with GMP payments, affecting some 95,000 members. Overpayments amounting to an estimated £126 million had been made over 30 years, and a small number of people had been underpaid. The government said it would not recover money already paid to individuals, and those who had been underpaid would receive the arrears in full with interest.
However, this is rare as schemes normally have the right to recover overpayments, regardless of the fact that it was their mistake. The Pensions Advisory Service head of dispute resolutions Tony Attubato says there are several situations in which there are no grounds to argue that the overpayment should not be repaid.
Such circumstances include when the complainant should have known an error had been made. For example, they were told they would receive £5,000 but were paid £10,000. At the very least they would be expected to query why there was a difference.
There are also no grounds to argue against returning overpayments when the error related to abatement rules rather than maladministration. For example if a member was in receipt of an ill health pension, the pension is stopped or reduced if he or she returns to work in the future. So if the pensioner was advised to let the scheme know but did not then the overpayment should be returned.
Attubato says overpayments can also be reclaimed where members have not changed their position. For example, the overpayment was not spent or it was considered that the expenditure was on items the member would have bought anyway had they received the correct benefits.
TPAS states it is normally reasonable for the pension provider to allow at least as long a period to repay the overpayment as that over which it was made. So, if the recipient had been overpaid for two years, it would be reasonable for the provider to allow the money to be repaid over two years. The provider should also take into account personal circumstances and should avoid causing ‘financial hardship’ when agreeing a repayment schedule.
But, the recipient does have a defence if he or she had a ‘change of position’. That because of the mistake, explains TPAS, “irreversible decisions or expenditure have been entered into which means you are now worse off”. It refers to money you would not have spent had the mistake not occurred.
This was the defence for Pearl Group Staff Pension Scheme member Barbara Wytch, who had been overpaid in pension payments for just over five years. The total amount of the overpayment was just over £3,000 – paid in monthly instalments of about £50. As a result of the overpayments her financial situation changed and she made decisions because of it.
In 2013 Wytch’s complaint was upheld against the trustees as the Pensions Ombudsman found that “she relied on the overpaid benefit and her position changed because of it”. He said that ultimately the overpayment had enabled her “to live a somewhat improved and more generous lifestyle than she would otherwise have had”. The trustees also had to compensate her £300 “for the disappointment of receiving a reduced income in future”.
Moreover, the ombudsman’s decision in favour of Wytch seemed to extend the scope of this defence to circumstances that might not have been accepted in the past, argues Stephenson Harwood partner Graham Wrightson.
“If this decision indicated a shift in approach by the ombudsman, pension schemes will need to engage more with their administrators,” he says.
Law firm Wedlake Bell says the term ‘change of position’ is not just limited to specific items of expenditure but can include improving one’s lifestyle. It represented Natalie McNicholas in what it calls a ‘David and Goliath’ case regarding the overpayment of almost £100,000 - funds that had formed part of her divorce settlement. In her complaint to the ombudsman McNicholas said that she should not have to repay the £97,626 overpayment as it was not due to any error on her part, but rather maladministration on the part of Scottish Widows.
The firm explains that the settlement she agreed with her former husband was driven by her current and future needs, and in particular the needs of one of their children. She had no reason to think that the sums quoted by the insurance company were wrong and had relied on the information when negotiating the divorce settlement with her former husband. The firm’s family team also advised that the consent order and financial terms of her divorce could not be revisited. The fact that the pension funds had already been allocated to provide professional care for their disabled child after her death also meant that a ‘change of position’ argument was fairly strong.
The ombudsman found in favour of McNicholas, stating: “Had maladministration not occurred, Mrs McNicholas would have known the true value of the pension and would have been able to negotiate either a larger share of her husband’s correct pension or a more favourable division of other assets.”
Wedlake Bell pensions and employee benefits partner Justin McGilloway says the advice to McNicholas was to go and seek redress via the Pensions Ombudsman – “a much cheaper and less intimidating forum in which to settle disputes”. “No doubt many others in similar positions would simply capitulate and hand the money back as a response to aggressive demands.”
TPAS says complaints about overpaid pension benefits is one of the most common reasons why people contact the organisation. Whereas in 2011/12 just 4 per cent of complaints were about overpayment, it has now more than doubled.
Muse Advisory director Avgi Gregory says overpayments are complex, to say nothing of the potential financial and reputational damage. “The trustees and the sponsoring employer must avoid the temptation to hide from the issue,” she offers. Gregory says systemic overpayment issues need to be managed and the trustee should work collaboratively with the sponsor to provide leadership and support to the administrators.
“Protocols and a plan of action should be developed to govern overpayment procedures with independent support and also with actuarial and legal advice.”
Stephenson Harwood’s Wrightson believes mistakes will be avoided if trustees get “their house in order”.
“Trustees need to talk to their administrators and make sure lax admin is tightened up,” he says. “A lot of trustee boards forget where their responsibilities lie and ignore this. They need to be fairly proactive. They will not always pick everything up as its complex but monitoring administrators properly, and challenging what they are doing, is a good step in the right direction.”
Nadine Wojakovski is a freelance journalist