Out-Law Analysis

Pensions disputes: UK ombudsman weighs in on pension benefits calculations

In two recent cases the UK’s Pensions Ombudsman (PO) has responded to member concerns that a provider has not calculated their pension benefits correctly.

In both cases, the PO confirmed that checking benefit calculations does not fall within his remit and members would need to provide credible evidence to support claims of that benefits have been miscalculated.

In a recent case (8 pages / 354KB PDF), a man referred to as Mr R complained to the PO that his pension is lower than the projections made by his provider. He also complained that the provider had failed to add bonuses since 2004. In 1989, Mr R transferred workplace pension scheme benefits to a section 32 buy-out policy with the provider. His transfer payment was invested solely in the with-profits fund. He received a benefits illustration stating that, depending on the rate of return, he might receive £5,690 as an annual pension.

During the period before he reached normal retirement age, Mr R received a number of further benefit illustrations. In 1995, an illustration stated that, depending on investment returns, the plan value might be £15,400 at his normal retirement age. In 2021, the provider told Mr R that it could not provide a forecast of the benefits due from the plan until the maturity date, but his pension was unlikely to pay more than the annual guaranteed minimum pension of £1,399.84. Mr R complained that the illustrations had forecasted higher figures.

The provider confirmed that the plan was invested in the with-profits fund, and growth had been affected by economic conditions. There had been periods where returns were very poor. The value of his pension would be used to provide the guaranteed minimum pension (GMP), which he was entitled to because his workplace pension scheme had been contracted out of the State Earnings Related Pension Scheme. If the plan value was higher than the cost of providing the GMP, he would have additional options including a potential lump sum.

When Mr R reached normal retirement age, the provider calculated his annual pension at £1400.36 and confirmed that the GMP had been met. The PO did not uphold Mr R’s complaint. The plan’s failure to perform as well as Mr R had hoped does not constitute maladministration by the provider – it was invested in with-profits funds and so the value was subject to market conditions. None of the documents sent to Mr R guaranteed benefits higher than the GMP.

The PO also determined that the provider’s decision to demutualise did not constitute maladministration and, in any case, fell outside his remit. Any claim that the plan value suffered as a consequence of demutualisation is purely speculative.

In his decision, the PO helpfully draws a distinction between the benefit guarantees offered by providers of buy-out policies, which were met by the provider in this case, and the “expectations promoted by insurers and their agents at the time” the policies were sold. The expectation was that there would be sufficient funds at retirement to provide a GMP as well as additional benefits, but market conditions meant the with-profits funds did not perform sufficiently well.

Unusually, the member in this case asked the PO to check that his benefits had been calculated correctly. The PO confirmed that this is not within his remit.  He stated that should Mr R wish to have the figures checked, he can request a copy of the provider’s calculations and obtain guidance from a suitably qualified financial adviser to verify the figures, at his own expense.

This mirrors another determination (8 pages / 681KB PDF) from August, in which a member complained about the provider’s calculations relating to an erroneous fund switch, the PO’s adjudicator concluded that it was for the member to prove these calculations were flawed or incorrect. Simply because the member did not agree with the method used by the provider this did not mean its calculations were flawed. The PO agreed and noted that the member had not been able to provide any credible evidence to support his claim that the policy value was calculated incorrectly.

Substandard service without financial loss

In another recent case (9 pages / 354KB PDF), a man referred to as Mr N complained about substandard administrative service in relation to his personal pension plan including failure to comply in a timely manner with Mr N's request to withdraw the remaining funds from the plan as income; incorrectly applied  income tax and failure to respond within stipulated timeframes to Mr N's concerns about potentially fraudulent activity – when he was telephoned by the provider – as well as his enquiries and complaint.

In March 2021, Mr N asked to withdraw remaining funds from two policies as income. A month later, he informed the provider that he had only received paperwork for one policy. Completed payment forms were sent to the provider by 12 May 2021. Mr N received a payment in respect of one policy by mid-June 2021 but did not receive payment from the second policy until around the end of September 2021 owing to an error by the provider.

Mr N complained that the provider had failed to apply the correct amount of income tax to his payment. The provider delayed in responding to Mr N’s queries about this tax deduction.  Mr N  claimed, and received, a tax refund from HM Revenue & Customs. The provider apologised on a number of occasions and offered a goodwill payment of £450, after its original award of £300 was not paid owing to an administrative error. The provider later increased its offer to £1,000.

The case adjudicator found that, while Mr N had not suffered any financial loss, he had suffered significant distress and inconvenience. A catalogue of administrative errors – including failures to explain that a telephone call was genuine, to send paperwork for both policies, to pay policy funds and a goodwill award within specified timescales, and to deal with Mr N’s enquiries and complaint in a timely manner, as well as unnecessarily applying income tax to payment – amounted to clear maladministration.

The Deputy Pensions Ombudsman (DPO) partially upheld the complaint. He decided that the £1,000 goodwill award for the non-financial injustice Mr N had suffered, together with the provider’s sincere apology, was sufficient redress. The DPO agreed that Mr N had received substandard service, but he did not suffer actual financial loss. There are lessons here about how they can put matters right when mistakes are made.

In making an award for non-financial injustice, the DPO took account of the fact that the provider failed to resolve matters in a timely and efficient manner. The PO will look to the way a complaint is dealt with when making an award for distress and inconvenience – relevant factors in this case include the provider notifying Mr N on a number of occasions that it would pay outstanding plan funds and a goodwill payment within specific timescales, but repeatedly failing to do so. 

The redress for non-financial injustice (5 pages / 348KB PDF) factsheet prepared by the previous PO continues to be relevant – it may guide providers when they offer goodwill payments. In it, the PO notes that the facts of many complaints will often straddle the criteria between different categories of distress and inconvenience, as in this case, and awards are modest and not intended to punish a respondent.

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