UK – Understanding The Challenges For Trustees In Recovering Pension Overpayments.
A notable determination by the Pensions Ombudsman, in the case of Mr E v Trustees of the Bic UK Pension Scheme, demonstrates that trustees can be faced with considerable challenges when attempting to recover overpayments made to scheme members.
Background to the case
The origin of the overpayment issue traces back to the 2019 case of Bic UK Limited v Burgess, in which the Court of Appeal decided that increases to pensions in payment under the Bic UK Pension Scheme had not been validly granted. As a result of this decision, member benefits had been overpaid, leaving the trustees to seek to recover these amounts.
Since the decision, several disputes have been brought before the Pensions Ombudsman by individual members who claim that the overpayments should not be recovered by the trustees. In this case, Mr E received pension overpayments totalling close to £91,000 over the span of 24 years. Below, we look at the considerations which led to the Ombudsman allowing Mr E to retain 93% of these payments, limiting the trustees’ recovery to just 7%.
Member-friendly considerations by the Ombudsman
Part of the Ombudsman’s decision to allow Mr E to retain 93% of the overpayments is due to the Ombudsman taking a particularly member-friendly and sympathetic approach, as demonstrated in particular by the following:
- Generous allowance should be made for unrepresented members
The Ombudsman acknowledged that a substantial number of individuals involved in disputes regarding overpayments do not have legal representation and often lack the expertise to formulate specific legal defences. Previous rulings by the Courts have concluded that when such litigants fail to raise specific legal defences, generous allowance should be made for them. In line with this, the Ombudsman found that Mr E’s broad complaint that the recovery was “unfair” sufficiently covered the range of defences discussed below.
- The key question for the Ombudsman will be whether it is equitable to recover the overpayments
In this case, the trustees were seeking to recover the overpayments by reducing future pensions instalments using a mechanism known as “recoupment”. Under general equitable principles, recoupment can only be used if it is fair and equitable to do so. The Ombudsman acknowledged that change of position and estoppel may not be available as specific, free-standing defences to a claim to recover overpayments through recoupment (as opposed to a case where the trustees seek to recover the overpayments directly from the member). However, the Ombudsman considered that the equitable principles underlying change of position and estoppel are of assistance when assessing whether or not it is equitable to permit recoupment.
The Ombudsman’s consideration of the defences
The member-friendly approach can be seen in the way the Ombudsman approached the equitable principles underlying the defences:
- Change of position
To demonstrate a change of position defence, it is necessary to show that the recipient’s circumstances changed detrimentally as a result of the overpayment. The Ombudsman noted that detriment can normally be shown by the fact that the recipient has spent the money on specific items which they would otherwise not have bought, but for the overpayment. However, in this case, the Ombudsman was satisfied that Mr E’s rise in general standard of living over and above what it would have been but for the overpayments was sufficient to demonstrate detriment.
- Estoppel by representation
To demonstrate an estoppel by representation, there must be a clear representation upon which it is reasonably foreseeable the complainant will act. The Ombudsman found that an overpayment on its own will not usually amount to a representation that the member is entitled to the overpayment. However, somewhat surprisingly, the Ombudsman considered that the pension documentation Mr E received (including retirement statements, monthly payslips and annual P60s) amounted to representations that Mr E was entitled to the amounts paid.
And the Ombudsman went further, finding that even without these explicit statements, the payment of the pension amounted to an implied representation that Mr E was entitled to the pension payments, given that the trustees were under a legal obligation to pay the correct amount.
- Defence of laches
Broadly, laches is a defence which applies where the trustees have delayed asserting their right to recover the overpayment and, because of this delay, they are no longer entitled to recover the overpayment. Contrary to the trustee’s view that the laches period began after the Court of Appeal determination in 2019, the Ombudsman found it started when the trustees first told members about the potential issue in 2013 even though the mistake was not conclusively proved until later.
Period of recovery of the overpayments
It is also worth noting the Ombudsman’s comments on the period of recovery of the overpayments. The usual rule of thumb applied by the Ombudsman is that the period of recovery should be at least as long as the period over which the overpayments built up. However, the Ombudsman noted that affordability is also a relevant consideration, meaning that a longer recovery period may be appropriate in circumstances where applying the usual rule of thumb would cause hardship. In addition, affordability should be revisited if the member is able to demonstrate at a future date that the rate of recovery is no longer affordable.
What can trustees learn from this decision?
The Ombudsman’s sympathetic approach to members highlights the challenges that can be faced by trustees in recovering overpayments. Although trustees should endeavour to avoid overpayment issues arising in the first place by maintaining robust administrative processes, it is fairly common for overpayments to occur even in well run schemes.
To put themselves in the best position to be able to recover any overpayments, trustees should be careful to ensure that:
- any representations made to members about entitlement to benefits are appropriately caveated;
- communications with members about potential issues are clear and explain the potential consequences for members; and
- issues are resolved as soon as possible and not allowed to run on.
For further information, please contact:
Claire Collier, Linklaters
claire.collier@linklaters.com
