Paul Ashcroft
- Senior Associate
- Pensions & Employee Benefits
The Pensions Ombudsman (“TPO”) has recently issued two noteworthy determinations with important implications for pension schemes and their members: (i) Mr H v Olivetti UK Limited Pension and Life Assurance Scheme (“Mr H’s Case”); and (ii) Mr N v Volkswagen Group Pension Scheme (“Mr N’s Case”)
Key Recent Findings of TPO:
- In Mr H’s Case, an employer’s promise to provide “mirror benefits” equivalent to the terms provided by a former scheme was contractually binding.
- In Mr N’s Case, TPO confirmed that there is no obligation on schemes to complete GMP equalisation exercises within a prescribed period of time. However, Trustees who say they will update members about GMP equalisation projects, must do so!
Mr H v Olivetti UK Limited Pension and Life Assurance Scheme
Mr H was originally provided with special terms under his previous pension scheme, entitling him to a pension of two-thirds of his final remuneration at age 60, subject to 25 years of pensionable service. Due to an internal reorganisation, his employment was transferred in 1996 and his pension benefit was subsequently transferred to a new scheme in 1998. At that time, Mr H was assured in a memorandum from his employer that his benefits under the new scheme would “mirror” those of the previous scheme.
Amongst these benefits was a right for Mr H’s pension to be increased at 5% per annum after retirement, as specified in a supplementary announcement. However, in 2015, Mr H was granted only a fixed increase of 3% per annum, in line with the scheme rules applicable to all members.
The trustee of the scheme argued that any promises or representations made to Mr H could not create additional pension rights under the scheme. However TPO held that all of the necessary elements of a binding contract were present, ensuring that he would receive the benefits provided under the previous scheme. Even though the scheme rules were not amended directly to cater for Mr H’s agreed benefits, TPO determined that an enforceable contract existed between the employer and Mr H as the elements of a binding contract (namely offer, acceptance, intention and consideration) were present and he was therefore entitled to receive the benefits under the previous scheme.
The Ombudsman also found that the employer had breached the implied duty of good faith by failing to uphold the relationship of trust and confidence between an employer and a scheme member.
As a result, TPO directed the employer to amend the scheme rules or augment Mr H’s benefits to reflect the promised mirror benefits. The employer was ordered to pay Mr H £1,000 for serious distress and inconvenience.
Wedlake Bell Comment
This determination serves as a useful reminder to employers and trustees that, in certain circumstances, promises made to members can lead to enforceable benefit entitlements, even in the absence of formal trust deed amendments.
In Mr H’s Case, TPO held all the elements of a legally binding contract were present meaning that his contract of employment ‘trumped’ any benefits to the contrary under the scheme rules. However, it remains the case that where there are no contractual promises to the contrary, members’ benefits will be governed by a scheme’s governing rules.
The legalities around such contracts (also known as “extrinsic contracts”) are highly complicated. If in doubt, seek legal advice!
Mr N v Volkswagen Group Pension Scheme
Mr N lodged a complaint with TPO, arguing that the trustee did not have a satisfactory plan to issue revised guaranteed minimum pension (“GMP”) equalisation calculations to members.
GMP represents the minimum guaranteed level of pension that a scheme was required to provide to members who were contracted out of the State Earnings-Related Pension Scheme between 6 April 1978 and 5 April 1997. The issue of GMP equalisation was explored in more detail in our Pensions Compass article here.
GMP Equalisation:
- Legislation required GMPs to be calculated on a different basis for men and women to reflect differences in the state pension age at the time.
- The High Court confirmed, in the ‘Lloyds No.1 Case’ (2018) that schemes were “under a duty to amend the Schemes to equalise benefits for men and women so as to alter the result which is at present produced in relation to GMPs”.
Whilst the Lloyds No.1 judgment was handed down in 2018, the judgment was slow to be implemented in some cases due to, amongst other reasons, uncertainties that persisted after the judgment and resource constraints.
TPO made the following key observations:
- There was no prescribed deadline for pension schemes to complete GMP equalisation by a specific date.
- The pensions industry faced “significant demand” while undertaking GMP equalisation, with only “finite resources to meet that demand”.
- The trustee in this case had taken appropriate action by working closely with the principal employer and professional advisers to develop and adopt an appropriate methodology.
Wedlake Bell Comment
TPO’s acknowledgement of the challenges facing the pensions industry regarding GMP equalisation will be welcome news for trustees and advisers. This case suggests that there is unlikely to be an obligation for pension schemes to complete GMP equalisation within a set period.
However, TPO still awarded Mr N compensation of £500 as the trustee had committed to updating Mr N but subsequently failed to do so. TPO stated that “failure to keep Mr N informed on progress, even if there was not a great deal to report, would have continued to cause him unnecessary distress and inconvenience”.
Whilst the delay was specific to Mr N’s circumstances (a former member of the scheme), trustees should be mindful not to unreasonably delay the equalisation process and not to delay issuing updates and communications, including to those who are no longer scheme members (even if trustees may feel there is nothing much to report). Again, if in doubt, seek legal advice.
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