2021 saw a number of Pensions Ombudsman decisions on reclaiming overpaid benefits.  The direction of travel was decidedly member-friendly.  I’m left wondering what schemes can do to improve the odds of being able to recover excess payments.

What can stop a scheme from reclaiming overpayments?

If benefits are overpaid, the starting point is that trustees have a duty to try to recover the assets paid out incorrectly. It’s well-established that money paid by a pension scheme in error can be recovered, even if the scheme has been careless. Often the simplest way is to offset the overpayment against future payments (recoupment) although this may not be an option if the overpayment is too large.

But the member who has received the overpayment may have defences to the repayment demand.  One of the most common is a change of position defence.  Broadly, the scheme will have to abandon its claim if the member has already spent the overpaid money, he can’t now get it back and it would be unjust to make him repay it.

The change of position defence only works if the member acted in good faith when he made those irreversible spending decisions.  Several of the 2021 cases focussed on this issue.

When will a member be acting in good faith?

If the member knew there was an overpayment but accepted it anyway, that is clearly bad faith.

Then there are cases where the member suspected he was receiving more than he should but deliberately turned a blind eye and failed to check with the scheme.  Again, bad faith.

Where it gets tricky is where the scheme provided enough information for the member to discover the mistake.  Did the member act in good faith if he could have spotted it but didn’t, for example because he didn’t read the information properly?  Can a careless member act in good faith?

According to the Ombudsman the answer is yes.  He says the test for good faith is a subjective one, i.e. the question is not whether any reasonable member should have realised the mistake, but rather did this particular member in fact spot it.

Mrs E

In June 2021, the Ombudsman decided that it would be unjust to require Mrs E to pay back about £7,000 of an overpayment she had spent on expensive wedding presents and holidays.  Mrs E had been given enough information about how her benefits had been calculated to realise the scheme had made a mistake, but the Ombudsman accepted that she hadn’t in fact spotted the error.  Mrs E’s understanding of pensions was “very basic at best” and she had only glanced at the documents.  This apparent carelessness did not stop her from acting in good faith.

Mrs S

In August, the Ombudsman decided that Mrs S, a widow receiving a spouse’s pension, had acted in good faith when she failed to tell her scheme that she had started living with a new partner.  This was despite being told (through an initial leaflet and then annual newsletters) that she must inform the scheme if she started cohabiting and her spouse’s pension would then stop.

Again the Ombudsman accepted that Mrs S hadn’t spotted this message, although he did say that he struggled a bit: “Mrs S is asking me to accept that not once in the 12 years from 2004 to 2016 did she read any of the newsletters sent to her each year… or, if she did, she did not understand that she needed to notify… cohabitation.”  Finding that Mrs S had acted in good faith, he accepted Mrs S’s change of position defence meaning that her scheme could not pursue the overpayment of about £55,000.

Where does this leave trustees?

As Mrs S’s scheme remarked, this all sets a worrying precedent and seems to give members a licence to claim ignorance.  The Ombudsman has stressed that these cases are very fact dependent and involve finely balanced judgment calls.

So what can trustees do to tip that balance in their favour and maximise their chances of reclaiming overpayments (recognising that mistakes – while regrettable – will happen from time to time)?

Well, at the risk of stating the obvious, clear and simple communications are absolutely key.  The easier it is to see how the member’s benefits have been calculated, the more difficult it will be for the member to say they didn’t spot the mistake.  The 2021 cases have set the bar pretty high for what counts as clear communication, so unfortunately this is not a fail-proof solution.  But greater member understanding and engagement is an aim well worth pursuing for its own sake.

Is it time to dust off at retirement packs and look at them with fresh eyes?  When were they last reviewed?

Most schemes will (like Mrs S’s scheme) rely on receiving information from members to avoid certain overpayments where a member’s circumstances change (e.g. death or ill health).  Mrs S’s pension continued to be paid for 12 years after she stopped being entitled to it and this only came to light when the scheme asked members to confirm whether their circumstances had changed.

Schemes with benefits linked to a member’s circumstances should consider:

  • unmissable messages about informing the scheme, and
  • regular checking exercises to flush out any information that members have failed to share of their own accord.

Finally, is there a case for carrying out a regular sampling of benefit calculations to flush out any recurring or systemic issues?

Where does this leave incorrect benefit statements?  Are trustees now more at risk here too?

In a nutshell, no, but as we’re often asked about this issue it’s worth mentioning that the Pensions Ombudsman doesn’t appear to be taking a more member-friendly direction in these cases.

In the same month as the Ombudsman found that Mrs S hadn’t read the information provided to her but could still keep a large overpayment, he told Mrs D that she should really have known something was wrong with her benefit statement and couldn’t insist on receiving the higher benefits she’d been told to expect.  This was despite Mrs D repeatedly asking the scheme administrators to check that the information they had given her was right and receiving written assurances.

The bar for a successful member claim based on an incorrect benefit statement is apparently still high.  One reason is that these statements typically contain warnings that the member should not rely on the figures given, which are just estimates.  In those circumstances it is difficult for the member to show it was reasonable to rely on the information.

The case of Mrs D shows how important it is for schemes to make sure the warnings in their statements are sufficiently robust, so if these haven’t been looked at in a while consider a fresh review.

Unfortunately for schemes, such disclaimers aren’t appropriate in overpayments cases.