Pensions Essentials - April 2024

By way of reminder, the key changes that have been made are:

• Benefits no longer have to be tested against the lifetime allowance and no tests have to be carried out at age 75.
• There is a new “lump sum allowance” which imposes a fixed cumulative limit of £268,275 on the tax-free cash that can be paid to a member as pension commencement lump sums, the tax-free part of uncrystallised funds pension lump sums or stand-alone lump sums. Serious ill-health lump sums, trivial commutation and other small lump sum benefits are not tested against this allowance.
• There is also a new “lump sum and death benefit allowance” which imposes a fixed cumulative limit of £1,073,100 on the tax-free elements of lump sums that can be paid in life and death, to or in respect of an individual. In addition to the amounts covered by the lump sum allowance, it also includes the tax-free elements of serious ill-health lump sums and most lump sum death benefits.

For more details on how benefits (including those paid prior to 6 April 2024) use up the new allowances and the information that will need to be given to both HMRC and individuals, see our briefing setting out the new lump sum allowances in more detail.

HMRC have said that not all of the detail is currently accurately set out in legislation and further minor technical changes still need to be made.  Watch out for additional guidance from them too.

In 2019, the Court of Appeal held that increases to pre-1997 pension, paid since 1992, were not permitted under the rules of the BIC UK Pension Scheme as the relevant amendment had not been properly made.  This meant that members had been overpaid pension increases, in some cases for 25 years. This latest Ombudsman determination concerned an overpayment from the Scheme to E of £91,000 over a period of 24 years. 

Up to 2013, E received letters from the Scheme setting out the annual increase that would be paid to him and that it had been calculated in accordance with the Scheme rules.  Those letters did not contain any additional caveats.  In 2013 he was notified that problems with the increases had been identified and future increases would be suspended until the issue had been resolved.  Accrued increases continued to be paid.

The Ombudsman considered whether the trustees could recover the overpayment. In determining this, he concluded he could consider whether it was fair to allow recoupment at all, which meant considering whether it was equitable to permit a change of position or estoppel defence to recovery. 

In relation to a change of position defence, the factors to consider were:

• Good faith: Did the member know or ought they to have known that they were being overpaid?
• Detriment: Had the member’s circumstances changed to their detriment as a result of the overpayment? This generally means that the overpayment has been spent in a way that cannot be reversed.  This could include general household expenses or an increased standard of living.
• Causation: Was there a causal link between the change of position and the overpayment such that the member would not otherwise have acted in the way that they did? 

In this case, it was clear up to 2013 that E was acting in good faith and had increased his standard of living as a result of the overpayment and that this spending was irreversible. Bank statements were not available for the full period of the overpayment, but the Ombudsman said he could still form a view on causation based on E’s likely expenditure patterns from looking at later evidence. It was clear that E lived within his means and would not have spent money that he did not have.

In relation to the period after 2013, the trustees did not make it sufficiently clear to E that overpayments were continuing to build up in relation to past increases. As a result, E also acted in good faith in relation to payments received after 2013 and this continued to be the case until 2019 when the result of the Court of Appeal decision was notified to members.

The Ombudsman also considered whether it would be equitable to allow recoupment by reference to the principles of estoppel. This meant considering whether:

• there was a clear representation to E on which it was reasonably foreseeable he would rely;
• E had acted reasonably in reliance on the representation; and
• E would suffer detriment if the representation was not held to.

The payslips E received prior to 2013 amounted to a clear representation and it was reasonably foreseeable he would spend his pension. He had done so in increasing his standard of living and would suffer detriment if the increases were now repayable. However, from 2013 onwards, there was no sufficiently clear representation from the trustees that he was entitled to the increases.

The Ombudsman also considered the defence of laches – where someone has delayed so long in exercising a right to recovery that it would no longer be equitable to allow them to do so. He concluded that a delay without knowledge of the problem could not give rise to the defence. However, the trustees knew that there was a potential issue in 2011 and the Ombudsman thought that the matter could have been resolved much earlier if the trustees had used appropriate diligence. He concluded it was unconscionable to allow the trustees to pursue their right of recovery in respect of the period after the 2013 announcement up to the Court of Appeal decision in 2019.

Out of the £91,000 overpaid, the Ombudsman determined that the trustees could seek recoupment of £6,500 at a rate of £200 per month.

The value data that trustees will need to make available to members with DC benefits via the dashboards includes “an annualised accrued value [of their DC pot], prepared using the methodology set out in the relevant guidance, less the elements regarding future contributions and growth, and calculated as if the individual has reached their retirement date on the illustration date”.  The guidance sets out how that value should be calculated.

DC trustees currently have to provide members with an annual illustration of the income that their DC pot could provide for them at their projected retirement date but do not currently have to provide information about the benefits that the current DC pot could secure.  These new illustrations will need to be calculated broadly in line with the existing projections and using the same assumptions.