News | February 1, 2022

PART 3 – Recovery of pension overpayments

Pension overpayments are a fact of life. Mistakes happen, erroneous scheme records are often left unchecked, benefits are transferred-out and members’ personal circumstances change. These factors and more can lead to trustees and administrators having to take decisions on overpayments – to seek repayment or not.

The starting position in law is that members are only entitled to benefits calculated in accordance with a scheme’s trust deed and rules and so where an overpayment has been made, trustees have a duty to correct this. This can usually be done by seeking repayment or recouping overpaid amounts from future benefits. However, members can avail themselves of various defences in order to prevent recovery or reduce the need to repay (e.g. change of position).

As you would expect, pension overpayments are an emotive issue – some cases go undiscovered for years meaning that amounts at stake can be significant and recovery can mean financial hardship for the individual in question. Overpayments are therefore a recurring issue for the Pensions Ombudsman.

Teachers’ Pension Scheme (PO-23848)

One such case from 2021 involved a complaint from a Mrs S that the Teachers’ Pensions Scheme (“TPS“) was seeking to recover an overpayment of her widow’s pension (approx.£73K net paid over a 12 year period) under a provision of the TPS which provides for a spouse’s pension payable after the member’s death to cease on subsequent remarriage or cohabitation. Mrs S argued that TPS should not have sought to recover the overpayment on various ground including the following:

  • she was not, on the facts, cohabiting, so TPS should not have ceased the payment of her pension;
  • the cessation of her pension on subsequent cohabitation was in breach of the age discrimination requirements;
  • the cessation of her pension was in breach of the Human Rights Act 1998 because it amounted to an infringement of her right to a family life and/or amounted to deprivation of her property;
  • she had a defence to recovery of the overpayment on the grounds of change of position and/or estoppel and/or limitation;
  • TPS should not have ceased her Guaranteed Minimum Pension (“GMP“), or offset the GMP due after the overpayment was discovered against the alleged overpayment of her pension, because this was a breach of section 91(6) of the Pensions Act 1995; and
  • there was maladministration by TPS in relation to the steps taken to seek to recover the alleged overpayment.

The Pensions Ombudsman partially upheld Mrs S’s complaint against TPS, finding the following on the points noted above:

  • TPS was able to legitimately conclude that Mrs S was cohabiting on the basis of forms completed by her;
  • TPS’s cessation of Mrs S’ pension on being notified of her cohabitation did not amount to age discrimination because the accrual of her late husband’s pension, to which the widow’s pension was attributable, pre-dates the introduction of age discrimination laws – 1 December 2006;
  • It was not a breach of the Human Rights Act 1998 to cease Mrs S’ pension on the basis that the cessation of the pension amounts to an infringement of her right to a family life and/or amounts to deprivation of her property because her right to the pension was fixed before the Human Rights Act came into force;
  • Mrs S had a defence to the recovery of the overpayment up to the date of cessation of her pension on the grounds of change of position because the Pensions Ombudsman was satisfied that she acted in good faith and relied to her detriment on the overpayment by increasing her standard of living over and above what it might otherwise have been. It therefore followed that, as a matter of law, TPS is unable to recover any of the overpayment;
  • TPS should not have set off the arrears of GMP against the alleged overpayment because this was in breach of section 91(6) of the Pensions Act 1995 and section159 of the Pension Schemes Act 1993 and amounts to maladministration.

WB Comment

The determination serves as a useful reminder of the Ombudsman’s approach to the change of position defence. The Ombudsman considered that there was no absolute requirement that the overpayment had to have been spent on extraordinary items. The requirement was for there to be a causal link between the overpayment and the expenditure, which must be irreversible. In Mr S’ case, the overpayment was spent on everyday living costs and the courts have been prepared to find that, where there has been a series of overpayments, a general change of position in the form of increased outgoings is possible. The Ombudsman concluded that Mrs S could rely on the defence since, on the balance of probabilities, but for the overpayment, she would not have incurred the cost of her slightly improved lifestyle. The Ombudsman also concluded that Mrs S satisfied the requirement for good faith and could therefore rely on the defence of change of position.

One other point that came out of the determination was clarification that recoupment of past overpayments cannot be offset against the member’s GMP. Whilst the Ombudsman concluded that TPS was not prohibited by section 91(6) of the Pensions Act 1995 from exercising the set-off, section 91 is subject to section 159 of the Pension Schemes Act 1993. Section 159 provides that an assignment or charge on a GMP is void. The Ombudsman held that although the section did not refer to offsetting, “charge” in the circumstances, includes offsetting. This is a salutary warning against recouping overpayments from GMPs.