Interest 1

Section 160 of the Pensions Act 1995 inserted a new section, 151A, into the Pension Schemes Act 1993 specifying the Ombudsman's power to require pension schemes to pay interest on scheme benefits which should have been paid earlier. The precise wording of s151A is that the Ombudsman's direction "may also require the payment of interest at the prescribed rate". This is not mandatory language and could on the face of it permit the Ombudsman to direct a higher rate of interest if he wished. However, the Ombudsman commented in his Annual Report 1996/97 (at p48) that:

"Although the real raison d'être of this new provision has never been revealed to me - it purports to be enabling but may be read as restrictive - the prescribed rate will become the general practice.According to the DSS consultation paper dealing with this issue the aim of the interest rate is to "restore the lost economic value of the benefit and not to act as a punitive measure."

The previous practice of the Ombudsman had been to award interest at the rate appropriate to judgment debts, in other words the sort of debts which are enforced through the courts. It is curious that there was no Pension Law Review Committee recommendation about the introduction of this alternative approach to awards of interest. The alternative rate is contained in the Personal and Occupational Pension Schemes (Pensions Ombudsman) Regulations 1996 (SI No 1271) reg 6, which provides that "... the prescribed rate of interest shall be the base rate for the time being quoted by the reference banks". This base rate is published each month in table 7.1J of "Financial Statistics" by the Office of National Statistics. The rate varies more than the judgment debt rate and also tends to be lower.

It should be noted that s151A only deals with late payment of scheme benefits and therefore the Ombudsman would have even more flexibility in relation to other late payments. It may, however, become the practice of the Ombudsman to follow the s151A rate in all cases where he directs that interest is paid.