Is interest payable on an unexpected payment made to a pension scheme member, where the scheme rules are silent as to the payment of interest?
The Deputy Pensions Ombudsman was asked to consider this issue in the case of Mr X.
She concluded that a member was not entitled to interest on a payment that arose from the trustees’ failure to properly equalise normal retirement ages in the scheme.
What were the facts?
Mr X was a member of the Robins Davies and Little Group Pension & Life Assurance Scheme (the Scheme). In the early 1990s, as a result of decisions made by the European Court of Justice, occupational pension schemes were required to equalise the normal retirement ages (NRA) of men and women for future service.
With the intention of complying with this requirement, the trustees of the Scheme issued a notice stating that the Scheme’s NRA for men and women would become age 62 on 1 December 1994. The Scheme was administered on this basis until, in 2013, the principal employer became insolvent and the Scheme entered into a Pension Protection Fund (PPF) assessment period. Mr X had retired on 30 November 1999 and his benefits were calculated on the basis that the part relating to the period from 1 December 1994 to 30 November 1999 accrued with a NRA of 62.
Following a review on behalf of the PPF of the Scheme’s governing documents and a consideration of whether the Scheme’s benefits had been correctly administered, it became clear that the NRA of men and women had not been properly equalised by the 1994 notice. The notice did not comply with the requirements of the Scheme rules (it was signed by the company secretary rather than by a director).
As a consequence, NRAs in the Scheme were not properly equalised until 26 April 1999, the date on which a definitive deed and rules took effect. Mr X’s benefits for the period 1 December 1994 to 26 April 1999 should therefore have been calculated on the basis of a NRA of 60, which was the more favourable NRA of female members until NRAs were properly equalised at age 62. The benefits of Mr X (and other members) had been underpaid. The trustees made Mr X an extra payment of £18,779 to reflect the underpayment and increased his pension going forward by just over £1,500pa. However, the trustees refused to pay interest to reflect the late payment.
Why did Mr X complain?
Mr X complained to the Ombudsman that he was due interest on the extra payment, which was made to him in arrears. The Deputy Ombudsman dismissed his complaint, stating that “Mr X has no absolute entitlement to interest under the Scheme Rules or at law”. She considered the approach of the trustees to be “entirely reasonable”, namely it was relevant that they took account of the fact that:
- the Scheme rules contained no guidance on the application of interest;
- the Scheme was in a PPF assessment period;
- no member in a similar situation to Mr X had interest applied to the arrears of pension; and
- a payment of interest could reduce the funds available to remaining members.
A surprising result?
The determination is interesting. Fundamentally in this case, the trustees failed to pay benefits in accordance with the Scheme’s governing documents. The Deputy Ombudsman asserts that the extra payment would not have been due to Mr X but for a failure to properly implement a decision of the trustees. This is exactly the point. Mr X had an entitlement to the extra payment and should have been paid a higher level of benefits from the date on which he began to draw his pension. He lost out by not receiving the extra sum owed until 2015 and quite reasonably suggested that this loss should be made good including by applying interest. However the fact that the Scheme was not supported by a solvent sponsoring employer seems to have been critical in the reasoning of the Deputy Ombudsman.
The Deputy Ombudsman confirmed that the trustees acted reasonably when taking into account the fact that the Scheme was in a PPF assessment period with no solvent sponsor. Had the Scheme been ongoing, with the payment of interest having little or no impact on other members, perhaps the Deputy Ombudsman might have concluded that the trustees should have paid interest on the extra payment. Trustees of ongoing schemes may point to this determination in support of a decision to make a payment in similar circumstances, without applying interest. However where the sponsoring employer is not insolvent, it is quite possible that a complaint to the Ombudsman or an application to Court could succeed. Trustees should consider their position carefully before relying on this determination where their scheme is ongoing.
The other interesting point is that the first increased pension instalment was paid late (12 days after its due date) along with the pension arrears. When Mr X complained to the Ombudsman the trustees offered Mr X £1,000 in compensation to try to settle the matter. The Deputy Ombudsman did not make an award for distress and inconvenience when making her determination and instead stated that the trustees are not required to take any further remedial action.
This post was contributed by Patricia Bailey. For more information, email firstname.lastname@example.org.
 Including Barber v Guardian Royal Exchange  1 QB 344 and Coloroll Pension Trustees Limited v Russell and others  EUECJ C-200/91