Deputy Pensions Ombudsman upholds currency conversion complaint

The Deputy Pensions Ombudsman (DPO) has partially upheld a member’s complaint regarding the currency conversion rate used in a case where the member’s salary and bonus were awarded in Swiss francs (CHF) but the member belonged to a UK pension scheme (Mr Y CAS-12388-L3Z2).

Mr Y worked in Switzerland and his salary and bonus figures were amounts expressed in CHF. He remained an active member of his employer’s UK pension scheme. The scheme rules were silent as to the basis on which any salary denominated in foreign currency should be converted into pounds sterling. My Y complained about the basis on which his employer had converted his salary and bonus into sterling for the purposes of calculating his pensionable salary. It appeared that the basis used had varied over time.  However, there had been times when the employer had set notional UK base salaries and bonus values for employees working overseas and used these for pension scheme purposes rather than simply converting the foreign currency amount into sterling on the relevant day.  

The DPO said that in converting a foreign currency into sterling there was “some room for administrative flexibility and for internal policy and practice to apply, particularly in relation to the payment of a discretionary annual bonus”. If the employer used a particular conversion rate reasonably determined by its finance department, that would be an acceptable rate to use provided it was reasonably consistent with published rates at the relevant time. The DPO said she would also consider it reasonable to apply either the exchange rate on the date the amount becomes payable or on the date of actual payment or an average rate for the relevant month. However, it was a breach of the scheme rules to use a notional amount rather than using an exchange rate. The DPO ordered the pensionable salary to be recalculated in those instances where the employer had used a notional amount rather than applying a conversion rate.  

Our thoughts

In our experience scheme rules are usually silent on the question of how a salary denominated in a foreign currency should be converted into sterling. In such circumstances the employer should be able to show that its approach is based on a market exchange rate. The employer should keep records of the approach taken to currency conversion. One of the issues that arose in this case was that it was not always easy for the employer to establish what approach had been used at a particular point in the past.