In the case of the Estate of the late Mr R (PO-17639), the Ombudsman has held that scheme trustees should have done more to explain benefit options to a terminally ill member and has ordered the trustees to increase the widow's pension to the amount which the widow would have received had the member brought his pension into payment before death, and to pay the member's estate the lump sum which the member would have received had he brought benefits into payment before death.

The member had been diagnosed as terminally ill in November 2012.  At that time he was a deferred member of the scheme.  In April 2016 the member contacted the scheme administrator by telephone to discuss his options under the scheme.  He informed the administrator that he was terminally ill.  Shortly afterwards, the scheme administrator wrote to the member setting out two options: 1. a cash lump sum of about £19,000, an annual pension of about £12,000 pa and a widow's pension of about £7000 pa; or 2. a cash lump sum of about £61,000, a pension of about £9,000pa and a widow's pension of about £7,000.  The letter also flagged the possibility of taking all benefits as a tax free lump sum if the member could provide medical evidence that his life expectancy was less than one year.

The member died in August 2016 without having exercised any of the options outlined in the administrator's letter.  His widow was informed that she would receive a widow's pension of approximately £5500 pa.  She queried why this was less than the figure previously quoted and why there was no lump sum.  The scheme administrator explained that the figures previously quoted were benefits available to Mr R during his lifetime as a pensioner member of the scheme.  As the member had remained a deferred member, the benefits would be calculated accordingly, meaning that the widow's pension was lower and there was no lump sum.  The widow complained that the trustees had failed to make clear to the member that his estate and his widow would be severely disadvantaged if benefits were not taken during his lifetime.

The Ombudsman upheld the complaint.  He held that the trustees had a duty to provide Mr R with the relevant information to enable him to make a fully informed decision about his options under the scheme.  The trustees had breached this duty because the way in which the options were presented meant that it would not have been clear to Mr R that the two options presented would not remain available on his death, particularly as the letter did not mention what benefits would be payable on death in deferment.  Given that the trustees knew that the member was terminally ill and that benefits payable to his widow and estate would be considerably lower if no action was taken during his lifetime, the Ombudsman found that the trustees should have satisfied themselves that Mr R had actually received the letter and that he understood the significance of the information it contained.

The Ombudsman ordered the trustees to pay to the member's estate the lump sum which would have been payable had the member chosen option 2 during his lifetime, and to pay to the member's widow the widow's pension which would have been payable had the member chosen option 2 during his lifetime.

Our thoughts

This determination highlights that member communications may need to spell out points that might seem obvious to someone more familiar with pension schemes, for example that a benefit option available to a member during his lifetime may not be available to his spouse following the member's death.

If trustees are on notice that a member's request for benefit options has been prompted by the fact that a member is terminally ill, this determination suggests that the Ombudsman will expect the trustees to check that information sent has actually been received.  In such cases, communications should explain not just the benefit options available to the member during his lifetime, but also what benefits will be provided if the member dies without having exercised any of them.

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Rachel Rawnsley

Rachel Rawnsley

Partner, Head of Pensions
United Kingdom

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Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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Catherine McAllister

Catherine McAllister

Partner, Pensions
United Kingdom

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Rachel Uttley

Rachel Uttley

Partner, Pensions
United Kingdom

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