Out-Law Analysis 3 min. read

Pension disputes: clearly drafted terms critical

The latest determinations by the UK's Pensions Ombudsman (PO) once again emphasise the importance of clear and accurately drafted terms and conditions and effective communications with members.

The PO hears complaints by pension scheme members who have exhausted the provider's own complaints mechanisms. The latest determinations show that it will generally uphold the terms by which the member has agreed to be bound unless there is a compelling reason why this should not be the case.

Communicating clearly

In Dr N (CAS-38761-Q0T4), the PO dismissed a scheme member's complaint that her pension provider did not adequately communicate to her the implications of ceasing to make contributions to her pension plan.

Dr N's provider offered a loyalty bonus, applied to pension benefits on maturity. However, the terms of the policy required a minimum level of contributions in each of the five years before the member reached retirement. Dr N stopped making contributions ahead of her retirement age, as she had a number of policies and was concerned about breaching her lifetime allowance. She was therefore no longer entitled to the bonus under the terms of the policy.

While Dr N recognised that she did not fully meet the bonus payment criteria, she argued that the provider did not adequately communicate to her the implications of ceasing contributions. The PO disagreed. The provider had correctly applied the plan terms and conditions. Awarding a loyalty bonus outside of those terms was at the provider's discretion. There was no need for the provider to notify Dr N that her bonus was about to expire: there was enough information for her to be aware of this and to take remedial action.

In this case, the PO considered that it was reasonable for the provider to direct the member to clearly-drafted policy documents which set out the terms and conditions of the plan, including the bonus criteria, in language that the member could reasonably understand. The case shows the importance of clear communications between providers and members, as the PO and case adjudicators will scrutinise them should any dispute arise.

Understanding your SSAS

In Mrs T (CAS-45393-C2H6), the PO partially upheld a complaint by a member of small self-administered scheme (SSAS). Mrs T had received an unexpected tax bill of around £150,000 after an incorrect statement from the scheme administrators about the true tax position of an income drawdown payment available under the scheme. A SSAS is a small occupational pension scheme of which each member is usually a trustee, giving the members significant control over the scheme assets and investments.

The PO expects SSAS members, as trustees, to act prudently and to take advice on technical matters. In this case, Mrs T had confirmed to the administrator that she was aware of the tax implications of taking money from her pension savings. However, she had not taken financial advice, despite repeated recommendations from the administrator that she do so.

The scheme administrator admitted that it made a mistake during a phone call about the income tax rate that would apply to the income drawdown payment. Mrs T claimed that had she known about the real tax implications, she would have decided not to take flexi-access drawdown.

The PO found that providing the incorrect information was maladministration on the part of the scheme administrator. However, he did not deem this incorrect statement to be a "clear and unequivocal" representation of the tax position so, even though it was incorrect, it could not give rise to a legal claim for negligent misstatement. In addition, the administrator had already informed Mrs T of the correct tax position in the Benefit Options Form supplied to her.

The PO said that the non-financial injustice caused by the maladministration was not sufficient to justify the £500 minimum compensation award for distress and inconvenience. Although Mrs T's complaint was partly upheld, no further action is required of the administrator.

Ensuring accuracy of terms

In Mr D (CAS-39026-L7Y8), the PO again dismissed a complaint by a member in connection with a bonus payment. Mr D complained that the terminal bonus he received from the plan when he retired was lower than previously quoted by the provider. He also complained that the provider had reduced the bonus rate without notice; that funds had been "misplaced" by the provider; and that the provider had ignored his complaint for 18 months.

The PO found that the bonus terms were consistent with standard practice across the industry. The provider had explained that bonus rates could go up or down. In addition, the terms did not require the provider to write to members where there was a change to the terminal bonus rate, as the rate was not guaranteed.

The provider had made some calculation errors, but the errors were corrected before Mr D retired and would not have caused him significant distress. The provider paid the correct terminal bonus, in line with the terms of the plan. The funds were never "misplaced", as Mr D argued.

The cases of Dr N and Mr D are useful for providers whose policy terms provide for bonus payments. They indicate that, provided bonus terms are clearly and correctly described in member literature, the provider is not expected to hold the member's hand at every stage of the process to ensure they qualify for the bonus and receive it at the maximum possible level. It will be interesting to note if the Ombudsman's approach to this alters over time with increasing emphasis from the FCA and government on the protection of vulnerable customers.

Co-written by Lorna Khemraz of Pinsent Masons

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