The smooth operation of a pension scheme depends on an efficient flow of information between the employer and the member. Frequently, the Pensions Ombudsman is asked to consider scheme trustees’ and employers’ duties on providing benefit information to members.
Where the law is silent, this can be a tricky area to navigate and considerable uncertainty may arise. What level of information should trustees and employers provide to a member given a diagnosis of terminal ill-health? When might this information stray into the territory of unauthorised financial advice?
Two illustrative cases
In February 2019 (Mrs T – PO-19080), the Ombudsman dismissed a complaint on behalf of a deceased employee that the employer and its financial advisers failed to advise the dying member that his benefits would be reduced if taken early.
The Ombudsman distinguished between the employer giving unauthorised financial advice to employees (prohibited under the Financial Services and Markets Act 2002), and providing helpful information. The relevant information was available to the member in the scheme booklet, as was the suggestion that independent financial advice should be considered. However, the financial advisers were required to give advice to employees only on request, and the member did not ask for help.
In an apparently inconsistent decision, in March 2019 (Estate of Mrs N – PO-19673), the Deputy Ombudsman upheld a widower’s complaint where a member died one day before her approved ill-health early retirement date. As a consequence, having died in service, the member’s widower’s benefits were reduced. The Ombudsman found that the employer had unjustifiably jeopardised the member’s benefits by not setting the approval and retirement dates for the same day. The employer was directed to pay any difference to the widower in benefits, any tax liability incurred and interest.
Is success or failure a lottery?
How to reconcile these two decisions? Scheme employers and trustees can be placed in a difficult position after a member’s decision (or failure to take one) means their benefits are reduced. There are clear administrative issues in situations of a member’s terminal ill-health, where decisions can have a significant impact on survivor benefits.
While sympathetic, the Ombudsman must follow both statute and case law on the issue of employer guidance or advice to employees. Although in Mrs T’s case it would have been beneficial if the employer or the trustees had taken an extra step to assist the member, this would have involved taking a potentially unlawful responsibility in providing unauthorised financial advice. Nevertheless, employers and trustees should note that the Ombudsman has often found maladministration where they have failed to follow good practice. When a member is terminally ill, related benefit queries should be dealt with quickly, and all information provided should be accurate and clear.
Employers need not:
- highlight potentially detrimental member decisions; or
- advise members how best to exercise choices permitted under scheme rules.
But they should:
- ensure sufficient, clear information is available to the member;
- respond quickly; and
- suggest that members seek independent financial advice where the employer cannot help.
There is no automatically enhanced duty when a member is terminally ill and there is no implied duty on an employer to take reasonable care of an employee’s financial well-being. That said, it is simple human kindness to recognise that a member’s focus is unlikely to be on the finer details of their pension benefits where a terminal diagnosis has been received.