3 June 2024
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Ombudsman holds Trustees only entitled to recover small proportion of total overpaid pension

To The Point
(4 min read)

The Pensions Ombudsman has given a determination that considers in detail the defences that a pension scheme member may have when trustees seek to reduce a pension to recoup an overpayment.  The unusually lengthy determination concludes that the relevant issues that arise in a recoupment case will broadly be the same as those that arise when trustees are claiming that a member should pay money back to them.  The determination also concludes that pension payslips or a P60 may legally amount to a "representation" by the trustees that the member is entitled to the amounts being paid, potentially meaning that the legal defence of "estoppel by representation" could arise in overpayments cases much more often than previously thought.  This case is a "must read" for any scheme trustees and employers dealing with pension overpayment issues.

The Ombudsman has decided in an overpayments case that the Trustees are only entitled to recover £6554 of the total £90,934 in overpaid pension which they were seeking to reclaim from a member (Mr E CAS-55100-G3W9).  The Ombudsman's lengthy determination considers the possible defences where trustees are seeking to recover overpaid pension by deducting it from future payments. 

Background facts

The overpayment arose because for a long time the Trustees believed that members were entitled to pension increases equal to the lower of the increase in RPI and 5% in respect of pension in excess of GMP that had accrued before April 1997.  However, it subsequently came to light that such increases had never been validly documented under the terms of the scheme's amendment power, so members had no right to them.  The potential issue was identified in 2011 following the appointment of new scheme administrators.  An announcement to members regarding the issue was issued in 2013.  This announced the suspension of future increases.  As regards increases that had already been wrongly paid, the announcement said, "The Company has agreed that there should be no deductions, at this time, for increases already applied that may not have been in line with Scheme Rules…"  

Ultimately the issue of the validity of the increases went to court (Burgess v BIC).  The High Court held in 2018 that the increases were validly granted, but this decision was overturned by the Court of Appeal in 2019.  An announcement issued to members in May 2019 said that the trustees were in discussion with their legal advisers concerning how to implement the Court of Appeal decision.  It was only on 30 March 2020 that the Trustees notified Mr E that they would be reducing the amount of his pension to recoup total overpayments of over £90,000.  The Trustees proposed to recoup the overpaid pension over a period of 24 years and 8 months, being the period over which the overpayment had accrued.

The relevant law: "equitable principles"

Where trustees bring a claim against a member for the repayment of overpaid pension, a member may potentially have a defence on the grounds of "change of position" or the legal doctrine of estoppel.  In this case, the trustees were not asking Mr E to repay any money to them, but were instead reducing his pension under the doctrine of "equitable recoupment" so that they would effectively recover the overpaid pension over a period of time.  The Ombudsman therefore had to consider whether change of position or estoppel defences were relevant.

The Ombudsman concluded that equitable recoupment (ie reduction of a pension to recover an overpayment) will not be permitted if it would be "inequitable" to allow such a remedy.  In deciding what was equitable, the Ombudsman considered that it was appropriate for him to consider whether the member would have had a change of position or estoppel defence had the trustees been asking him to repay the money.  The Ombudsman thus effectively concluded that the issues to be considered are similar regardless of whether trustees are asking a member to repay overpayments or whether they are reducing pension in order to recoup overpayments.

In order to have a change of position defence to an overpayments claim, the member must have acted in good faith and the member must have changed his/her position in such a way that it would not be equitable to insist on the member making repayments.  The Ombudsman concluded that that Mr E would have had a change of position defence in respect of the overpayments that built up in the period until 1 August 2019.  After that date, the evidence was that Mr E had reduced his expenditure and was no longer spending up to the level of his income. The Ombudsman concluded that Mr E could not reasonably have been expected to realise from the 2013 announcement that the trustees might seek to recoup overpayments already paid.  The Ombudsman concluded on the evidence before him that Mr E was "the sort of person who lives within his means" and, had he been told correctly what he was entitled to in terms of pension, would have adjusted his expenditure down to his available income.

The relevant law: "estoppel by representation"

The Ombudsman also considered the principles of "estoppel by representation".  Under this legal doctrine, one party may not be allowed to rely on the strict legal position if it would be unconscionable to do so because (a) that party has made a clear representation on which it is reasonably foreseeable that the other party will act; and (b) the other party has reasonably acted in reliance on the representation and would suffer detriment if the party who made the representation is allowed to go back on it.

The Ombudsman concluded that because the trustees had a legal duty to pay the correct pension to Mr E, the monthly payslips and annual P60s that Mr E received in the period before the 2013 announcement amounted to unambiguous representations that Mr E was entitled to the amounts referred to.  The payslips and P60s were therefore capable of giving rise to an estoppel by representation defence, though this ceased to be the case once the 2013 announcement was issued (the test for an estoppel by representation being subtly different to "change of position").

Relevant law: the defence of laches

Because the trustees were reducing payments to recoup past overpayments (rather than requiring Mr E to pay money to them) there was no limitation defence available to Mr E under statute.  However, the Ombudsman concluded that, in respect of payments that built up before 1 August 2019, Mr E had a defence under the legal doctrine of "laches".  Where there is no statutory limitation period, a laches defence may apply if the claimant knew about a potential claim but delayed asserting his/her rights and the circumstances make it inequitable to enforce the claim.  The Ombudsman concluded that the time for laches began to run from 2011 when the trustees became aware of the possible issue of documenting the increases.  He rejected the argument that laches did not begin to run until the Court of Appeal had conclusively determined the issue.

Our thoughts

The upshot of this determination is than when considering what defences a member might have in an overpayments case, the Ombudsman will apply broadly the same "change of position" and "estoppel by representation" tests regardless of whether trustees are claiming that the member should pay money back to them or are reducing a pension to recoup overpayments.  The Ombudsman's conclusion that a P60 or payslip can amount to a "representation" for the purposes of an estoppel by representation defence means that such a defence might apply in many more circumstances than previously thought.

Another important lesson from this determination is the importance of spelling out to members as soon as reasonably possible that there may have been an overpayment and that they may be at risk of having to pay back part of the pension that they have already received.  If the trustees delay doing this pending the outcome of court proceedings, this may result in the member having a defence to an overpayments claim which means that less of the overpayment is recoverable.

Another notable aspect of this determination is that the Ombudsman comments that it is good practice for trustees to explore potential defences to overpayment during their own dispute resolution process even where the member has not set these out in detail.

To the Point 

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