A guide to handling pension overpayments

As the High Court rules on pension overpayments, PP brings you a guide to handling this tricky subject

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Pension overpayment disputes are common. They often arise as a result of an admin error, and members with a complex employment history can add to the risk.

Last month the High Court sided with the deputy Pensions Ombudsman (PO) when she said a member of the Teachers' Pension Scheme had "turned a blind eye" after he received a higher pension than he should have (PP Online, 20 January).

The claimant, who had returned to teaching after retiring, appealed the PO's decision twice. He argued it was up to the Teachers' Pension (TP) to point out his payments were wrong, but the judge rejected this. Linklaters associate Geoff Egerton (pictured) says the obligation on the claimant to notify TP of his re-employment is not a common restriction in private sector schemes, however.

"One area where this sort of issue may come up is in relation to ill-health pensions, where a member's health improves and they are under an obligation under the scheme rules to notify the scheme of any such improvement," he says.

There are a total of 27 Ombudsman determinations related to overpaid pensions, but Norton Rose Fulbright of counsel Philip Jelley says the majority of these are from the public sector.

Administrable causes of overpayments include the miscalculation of benefits; using the incorrect length of pensionable service; and not updating member records. Member errors include failing to notify administrators when a pensioner dies, or when a spouse in receipt of a widow or widowers' pension remarries.

Jelley says: "The process is normally that the error is discovered by the trustees, who then contact the member explaining that an overpayment has occurred and that it will need to be repaid. If the overpayment has occurred over a long period of time, the amount can be quite substantial."

Main lessons

There are two key issues to draw from the Webber v the Department for Education judgment. The first is that it helped cement the notion that members cannot simply say they were unaware of an overpayment. Sackers partner Katherine Dandy says: "Some people think that if the statement that's been sent to them is incorrect that they can just walk away and say ‘oh well, that's lucky' and hope it's not spotted.

"We do come across these cases where the complainant thinks whatever is in the statement is fixed in stone and can't be altered because the mantra is that trustees are only obliged to pay the right amount of pension. But they're not obliged to pay the wrong amount just because a mistake has been made."

Egerton adds: "This case makes it difficult for members to keep overpayments based on ignorance and confirms that they cannot turn a blind eye to the risk of an overpayment. If they know there is a risk that they are not entitled to the money, they are not entitled to keep it."

The other point is around limitation periods. Dandy explains there has been discussion over whether or not the PO follows a rule preventing overpayments from being recouped for more than six years since the complaint was brought. She says: "There's no debate about the High Court six-year rule but there has been some debate about whether that necessarily applies before the Ombudsman. This judgment has put that debate to bed."

Jelly thinks this latest ruling has not affected the normal limitation for claiming back overpayments. But he adds: "Special rules apply to cases involving negligence and fraud which may extend the time limits, depending on the facts."

Recouping excess payments

There are a number of ways overpayments can be reclaimed, but Jelley says trustees should ensure any repayment plan does not cause significant hardship to the member. "It is unusual for the entire amount to be repaid in one lump sum," he adds. For small amounts, the administrator may accept negligence and agree to cover the loss to the scheme rather than chasing the member for the money.

According to Egerton, another common way of recouping overpayments is to take it from future increases on the pension in payment. "This may, depending on the amounts of the overpayment, reduce the financial strain on the member and avoid reducing the amount of the pension," he says.

"The general guideline is that the Ombudsman would usually expect any recovery of an overpayment to take place over no shorter period of time than the mistake has gone undetected," Egerton says. As such, a repayment would be sought over a five-year period if the scheme had been overpaying the member for that number of years.

Averting disputes

Trustees are advised to highlight to members any obligations they have in relation to changes in their circumstances which could affect their pension. Effective communication should help prevent disputes. Egerton says: "Where there are easy checks which can be made without incurring any disproportionate cost or time, the trustees should also carry these out."

All communication to members should be written in plain English too. Jelley says: "Sometimes the key elements are set out in bold or capitals to highlight key aspects of the communication. Requirements for members should also be covered as early on in the communication as possible, and the communication should not be too detailed or lengthy."

Dandy recommends introducing regular spot checks to ensure payments are correct. "Quite often when pensions are put into payment the amount may not be revised or looked at again for a long period," she says. A good audit procedure will also ensure mistakes are avoided.

Allen & Overy senior associate Jason Shaw suggests asking members to check their retirement quotation before receiving their pension and to look at the amount again when they get their pension. He says: "If they are in any doubt about whether they are receiving the correct pension or not, they should contact the scheme's administrators."

Dandy adds: "The relationship between members and trustees is a partnership and they need to do their bit too. They can't just sit on an overpayment and pretend it's not there."

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