In the case of Mr E (PO-12248) the Ombudsman has ordered a scheme to offer the member the pension commencement lump sum to which he would have been entitled had his benefits been correctly calculated when first put into payment.
The issue arose as a result of a benefit review conducted when new administrators and legal advisers were appointed to the scheme. The scheme had been administered on the understanding that closure of the scheme to future accrual in 2005 had broken the link between benefits and members' final salaries. However, the review concluded that this was not the case. The benefits of deferred members who remained in service continued to increase in line with their salaries.
Mr E had retired while the review was still ongoing and had commuted part of his pension for a lump sum. The outcome of the review meant that he had been underpaid. The trustees sought to correct the underpayment on the basis that all additional benefits due to Mr E would be paid in pension form, ie he would receive a higher pension going forward and a back payment to cover the higher pension he should have received since retirement. Mr E objected to the fact that he had not been offered the opportunity to take an additional pension commencement lump sum (PCLS). The scheme administrator said that it was not possible to pay a PCLS on the grounds that the Finance Act 2004 required a PCLS to be paid no later than 12 months after the start of the pension. That time limit had expired, meaning that payment of a lump sum would attract punitive tax charges as an unauthorised payment. Mr E complained to the Ombudsman.
The Ombudsman upheld Mr E's complaint and ordered the scheme to calculate the correct lump sum and provide the details to Mr E. If Mr E decided to proceed on that basis, the correct lump sum should be paid to Mr E with interest and the scheme administrator should reach an agreement within 21 days regarding arrangements for recouping any overpayment of pension consequent on Mr E taking part of his benefits in lump sum form. If Mr E was personally liable for any tax charges for which he would not have been liable had the correct benefits been paid in the first place, the Ombudsman ordered that such tax charges should be paid by the Trustees. However, the Ombudsman pointed out that section 241(2) of the Finance Act 2004 provides that an unauthorised payment is exempt from being scheme chargeable if it is being made to comply with an order of a court or a person with power to order the making of the payment. It was therefore not obvious that HMRC would impose an unauthorised payments charge.
The issue which arose in this case is likely to arise in many cases where a benefit underpayment comes to light more than a year after commencement of the original pension, so the Ombudsman's approach is notable, but brings its own complications. As the Ombudsman's determination recognises, if the member now decides to take an additional PCLS, that will mean that his pension will have been overpaid in the period since the benefit correction was made, and arrangements will need to be made to recoup that overpayment.
The exemption in section 241 of the Finance Act 2004 also applies if it is made on the ground that a court or person with power to order the making of the payment would be likely to order the making of the payment if asked to do so. The question of what a court or Ombudsman would be likely to do in a hypothetical case is clearly open to interpretation. If trustees were to pay a PCLS outside the usual Finance Act 2004 time limits in reliance on section 241 in the absence of a court or Ombudsman determination, they would face the risk of HMRC taking a different view of what the Ombudsman would be likely to have done, and therefore taxing the lump sum as an unauthorised payment.
The Ombudsman determination could be seen as controversial in that it relies on a finding of maladministration (which would not be available to a court) to make an order regarding the form of the member's benefits where the benefits the trustees were paying were of equal actuarial value.