Complaint upheld for failure to comply with preservation requirements

The Deputy Pensions Ombudsman (DPO) has upheld a complaint against trustees for failing to apply the statutory preservation requirements in relation to a member who had an absolute right to take his pension before the scheme’s Normal Retirement Date (NRD) with no early retirement reduction.  As the member did not take his unreduced pension at the earliest opportunity, the DPO held that the preservation requirement required an uplift to be applied to the pension to reflect its late payment (CAS-79089-Z5M8).

Under the scheme rules, Professor N’s NRD was 65.  However, he benefited from special terms under the rules which allowed him to receive his pension from age 60 without early retirement reduction.  This was an absolute right, ie it did not require employer or trustee consent.

Professor N ceased to be an active member of the scheme at age 59.  Prior to his 60th birthday, Professor N received a letter from the scheme administrators reminding him of his right to retire at age 60 on an unreduced pension.  The letter said that if he did not wish to retire, he need take no further action.  Having reached age 62 without starting to draw his pension, Professor N realised that when he did start to receive his pension, no uplift would be applied to reflect the fact that he had deferred taking it.  So there was no “upside” to delaying commencement of the pension.  Professor N had simply lost out on the pension payments that he could have received from age 60 to 62.  The trustee declined Professor N’s request to have his pension payments backdated to age 60.

The DPO upheld Professor N’s complaint, as she found that the trustee had failed to apply the statutory preservation requirements which applied as a result of Professor N ceasing to be in active membership before “normal pension age”.  The preservation requirements provide that a member’s “normal pension age” is the earliest age at which the member is entitled to receive retirement benefits from the scheme, but ignoring rules that make “special provision” for early retirement, eg a right to retire subject to employer or trustee consent or an early retirement reduction.  Applying the definition in the preservation requirements, Professor N’s “normal pension age” was 60 rather than 65 (even though his NRD as defined in the scheme rules was 65).  The preservation requirements include a “fair value rule” requiring that where a member defers retirement beyond normal pension age, the total value of benefits to be provided must be an amount at least equal to the amount accrued to the member under the applicable rules.  As Professor N had a normal pension age of 60, an uplift therefore had to be applied if he deferred taking his pension until after that age.  

Our thoughts

The preservation requirements do not override scheme rules, but the legislation provides that where scheme rules do not comply with the preservation requirements, it is the responsibility of the scheme trustees “to take such steps as are open to them for bringing the rules of the scheme into conformity with those requirements”.  It is not clear from the determination whether the scheme rules completely failed to incorporate the preservation requirements in Professor N’s case.  The DPO found that the trustee either had an obligation to provide an uplift or had an obligation to pay compensation if no uplift was payable under the scheme rules.