TPO analyses defences to trustees’ claim for recoupment of overpaid pension benefits

The Pensions Ombudsman (TPO) determination in the case of Mr E and the BIC UK Pension Scheme provides a detailed analysis of the defences available to members where they have been overpaid benefits which the trustees propose recouping by reducing or suspending future pension payments.

TPO sets out his thinking as regards the application of change of position and estoppel defences to claims for recoupment and how the defence of laches works in a recoupment context. The case is important because it indicates how TPO will approach future complaints from members on recoupment and in what circumstances members might have a defence.

Summary of decision

TPO partially upheld the complaint made by Mr E, a member of the Bic UK Pension Scheme, regarding the recoupment of £90,934 of benefits that were overpaid to him over 24 years. He decided that it would not be equitable for the trustees to recoup the overpayments made prior to 1 August 2019 and that Mr E also had a defence of laches in respect of the recovery of overpayments relating to the period from 22 February 2013 to 31 July 2019 (the relevance of these dates is explained below).

This meant that the trustees could only recover £6,554 at a reduced rate to that proposed (and after they have obtained a County Court order – see here for further details of the CMG court case in which it was held that in order for recoupment to be applied when a monetary obligation to a pension scheme is disputed, the obligation must first become enforceable pursuant to an order from a competent court).

Mr E was also awarded £1,000 for significant distress and inconvenience.

Facts

Related court case

The complaint stems from the Burgess v BIC UK 2019 Court of Appeal judgment that a 1991 resolution by the then trustees (which included directors of the employer, BIC UK Limited) to increase pensions in excess of GMP annually by the lower of the Retail Price Index or 5% (the Pre-97 Increase) was ineffective as regards that part of a member’s pension relating to pre-April 1997 pensionable service. Although the trustees had a power under the 1991 rules to award discretionary pension increases, this discretion was not carried over to subsequent sets of rules. The court’s decision meant that affected members such as Mr E had been overpaid benefits.

Mr E

Mr E retired in 1995. His retirement statement which referenced pension increases contained no caveats. Mr E moved to Spain in 2003 but subsequently moved back to the UK in 2016 for health and family reasons and because of concerns regarding correspondence received from the trustees starting on 22 February 2013 (the 2013 Announcement) relating to the increase issue.

The 2013 Announcement

The 2013 Announcement explained that, because of a discrepancy between the scheme rules and application of pension increases which needed to be investigated, future pension increases would be suspended but there would be no “deductions, at this time, for increases already applied that may not have been in line with Scheme Rules”.

Although Pre-97 Increases would no longer be awarded going forwards, overpayments to members continued between 2013 and 2020 because the pension being paid included increases already awarded. For Mr E these overpayments were considerable, amounting to approximately £40,942.

Further trustee letters issued to pensioners regarding the issue and the court case did not explain that the overpayments were possibly still continuing, or the impact on pensioners should the court find that the Pre-97 Increases were invalid.

30 March 2020 Trustee Announcement

The trustees informed (the 2020 Announcement) Mr E that they would be reducing his pension to the correct level because of the Court of Appeal’s finding that the Pre 97 Increases had been invalidly granted and that they would also be recouping past overpayments over a period of 24 years and 8 months, this being the same as the period over which the overpayments had built up (TPR’s general position being that the recoupment period should be at least as long as the overpayment period subject to change in relevant cases, e.g. affordability).

Recoupment: what are the available defences and how should these be applied?

The starting position is that recoupment cannot be applied if it would be inequitable to do so. Because there is no case law developing this basic equitable principle, TPO had to consider how his consideration of general equitable principles should be undertaken. He accepted that although change of position and estoppel do not operate as “specific [or formal], free-standing defences” to a recoupment claim, the principles ‘underlying’ these defences are relevant and it is just and equitable to apply these when considering recoupment and equitability. Broadly, the relevant principles are those outlined in the ‘key concepts’ table above. Whether a defence of laches is available must also be considered.

Application of change of position principles to Mr E

It would be inequitable to allow recoupment in respect of the period before August 2019

• Good faith: TPO found that Mr E had acted in good faith up to the 2020 Announcement when he had actual knowledge that he was not entitled to the Pre-97 Increases (and indeed reduced his expenditure to below his monthly income from 1 August 2019 which is the point from which the change of position ‘defence’ was no longer available). There was no reason why Mr E would have known that the Pre-97 Increases were not validly granted up to the 2013 Announcement – he was told that increases were due, and his payslips set out increased amounts. 
  Even after the 2013 Announcement, Mr E acted in good faith – the 2013 Announcement did not explain that the pension still being paid included possibly incorrectly applied increases or the potential consequences of the trustees reserving their position to make future deductions from an affected member’s pension (i.e. that a member might have been overpaid and that this may need to be recovered). It should have done. The wording was ‘unclear’ and ‘over-optimistic’.
• Detriment: The available evidence showed that Mr and Mrs E’s standard of living was higher than it would have been but for the overpayments. This was enough to establish detriment. The purchase of the various properties by Mr E during his retirement was irrelevant in this respect – TPO considered what the overpayments were used for and concluded that they were not used to finance property purchases.
• Causation: TPO was satisfied that Mr E lived within his means and that he would not have gone above his available income but for the overpayments (both before and after the 2013 Announcement when Mr E’s pension stopped increasing)

Application of estoppel by representation principles to Mr E 

It would be inequitable to allow recoupment in respect of the period up to the 2013 Announcement

• Test 1: A clear representation/ promise and reasonable foreseeability: TPO found that the retirement statement, monthly payslips and annual P60s amounted to a clear express representation that Mr E was entitled to the overpaid pension. It is important in this respect that no caveats were included in these documents. In fact, TPO noted that the ‘mere’ payment of the pension itself was an implied representation of entitlement. This was because of the surrounding circumstances including the trustees’ legal obligation to correctly calculate the payments.
  TPO’s findings on what may amount to a representation for estoppel purposes means that an estoppel “may arise in many more circumstances that it is commonly thought”. However, other information provided to the member is also relevant and, in many cases, other information sent to the member will contain caveats or disclaimers which may mean that the representation test is not satisfied.
• Test 2: Act on the representation and spending reasonably in reliance: The same reasoning as applied to change of position meant that Mr E had acted on the representation and had spent reasonably in reliance on it.
• Test 3: Detriment suffered if trustees not held to the representation/ promise: Again, using the same reasoning as applied on change of position and detriment, Mr E would suffer detriment if the trustees were not held to the representation as regards Mr E’s pension.
• Wider equitable principle of unconscionability: Because the courts have referenced not applying estoppel which would favour one, or just some, of a pension scheme membership, TPO considered whether estoppel would be inappropriate because it could arguably favour Mr E over and above other members. TPO decided that his decision in respect of Mr E would not have a direct effect on benefits provided to other members and that he was not being favoured over other overpaid pensioners who had agreed to repayment because they could have complained to TPO. 

TPO concluded that it would be inequitable on estoppel by representation principles to allow the trustees to recoup the overpayments made in the period up to the 2013 Announcement. However, he differentiated the period after this from the change of position reasoning. This was on the basis that, despite being poorly worded, the 2013 Announcement meant that Mr E had the requisite knowledge for estoppel purposes which should have prompted queries as to whether he should be spending all his pension going forwards.

Application of estoppel by convention principles to Mr E

Inapplicable because no continuing common assumption as required

TPO noted that estoppel by convention was not applicable because it was not possible to meet the requirement to have mutual dealings between the trustees and Mr E – Mr E was simply told about his pension by the trustees and the dealing was all one way.