Pension Ombudsman lays down the law to, ahem, “The Law”
27 / 01 / 2016
The Pensions Ombudsman has upheld a complaint against the Police and Crime Commissioner of South Wales, on the basis that it had a duty of care as an employer to provide a police officer with information about the tax penalties on his retirement benefits that would arise if he were re-employed within a month of becoming entitled to his Police Pension Scheme benefits.
Protected Pension Age
On 6 April 2010, normal minimum pension age under a registered pension scheme increased to age 55. Pension received below this age (in the absence of ill-health) is generally regarded as an unauthorised payment thereby attracting punitive tax charges until the member reaches age 55.
However, members who meet certain requirements can receive benefits before age 55 without them being treated as unauthorised payments if they have a “protected pension age”. Broadly speaking, to take advantage of a “protected pension age” the member must have:
(i) been a member of a pension scheme on 6 April 2006;
(ii) had an actual or prospective right on 6 April 2006 to take his or her benefits before age 55; and
(iii) retired from their employment.
Re-employment by an employer that participates in the pension scheme to which the member belonged poses certain problems with regard to the protected pension age concept. Generally, such practice is prohibited and to do so can lead to the unauthorised payment regime coming into play. However, this re-employment restriction does not apply in certain cases, including where:
- there has been a break of least 6 months after retirement; or
- there has been a break of at least one month after retirement, and the member’s employment is “materially different in nature” to their employment immediately before retirement.
Mr Cherry was employed as a police officer with the Police and Crime Commissioner of South Wales from 1982 onwards. He was also a member of the Police Pension Scheme and had a protected pension age. He commenced receipt of his benefits in June 2011, but was re-employed by the Commissioner less than a month later in a role that was not materially different to his original employment. By accepting this offer of re-employment, he subsequently lost his protected pension age, which meant that pension payments he received became unauthorised, and subject to punitive tax charges.
Mr Cherry complained to the Pensions Ombudsman that the Commissioner and the scheme administrator, Capita, should have informed him about the tax penalties resulting from any re-employment. He argued that he should be put back in the financial position that he would have been in if there had been a sufficient break between his employment and re-employment.
In response, the Commissioner submitted that it had no legal obligation to advise individual employees about their tax and pension liabilities. But in a letter to the Pension Ombudsman the Commissioner’s legal department informed the Pension Ombudsman that a process had now been put in place to:
“ensure that individuals are not re-employed until a period of at least a month has elapsed. This is a step a reasonable employer, who has had the tax change brought to its attention, would inevitably take to assist its employees…”
Although it did not accept any legal liability, the Commissioner noted that it would indemnify Mr Cherry against the “unauthorised” tax liabilities arising from the legislative and regulatory changes to pension protection.
Pension Ombudsman’s determination
The Ombudsman upheld the complaint against the Commissioner.
Whilst agreeing that the Commissioner had no legal obligation to advise individual employees on their tax and pension liabilities, the Ombudsman stated that the Commissioner, as a responsible employer, had a duty of care to provide Mr Cherry with salient information about the tax implications of re-employment. The provision of such information did not amount to the employer giving advice. The Commissioner’s failure to provide the information led to Mr Cherry incurring tax charges on his retirement benefits, which it was therefore reasonable for the Commissioner to meet.
The Ombudsman is very clear in this case that there is a duty of care to make members aware of information that could affect their decision (two virtually identical determinations published by the Ombudsman on the same day also related to the Police Pension Scheme). This is a shift in attitude by the Ombudsman when one looks at the August 2014 determination in Ramsey. In this determination involving the Honeywell UK Pension Scheme the previous Deputy Ombudsman ruled that neither a pension scheme trustee, nor an employer or administrator, had any legal duty to warn a member that a reduction in the annual allowance from April 2011 would make him personally liable for an annual allowance charge if he elected to receive a major enhancement to his scheme benefits after that date.
Ombudsman cases tend to turn on their own particular facts but employers and trustees alike should be on notice to ensure that “salient” information is provided to members in the lead-up to their retirement, as a means of pre-emptively ensuring that difficult situations such as that involving Mr Cherry do not – wherever possible – rear their ugly heads.