Early retirement applications
Claims for early retirement form one of the most contentious areas for pension scheme trustees, sponsoring employers and members alike. The Pensions Ombudsman offers an easy method for members whose applications are turned down or misquoted or miscalculated to progress their grievances. While this may not be a comfortable thought for schemes, it does at least produce some general guidance on how to deal with such cases.
This paper looks at the approach taken by David Laverick, the current Pensions Ombudsman, in a number of early retirement cases.
1. Quoting benefits
The member, a doctor, received incorrect quotes of his early retirement pension as at ages 51, 53, 55 and 57 (the early retirement factors had not been applied). He found himself almost £7,000 pa out of pocket. He had retired on the strength of the quotes. He returned to work to supplement his income but was unable to rejoin the pension scheme. Soon afterwards he was diagnosed with angina. He claimed that if he had not been misinformed he would not have left his job and would have been entitled to an ill heath pension and a lump sum under the pension scheme (which he would have been in).
The Ombudsman ordered the scheme manager to find out if the member would have been an active scheme member at the time of his diagnosis and, if so, compensate him accordingly (i.e. for the loss of eligibility for an enhanced incapacity pension). He also held that “severe inconvenience” had been caused by the maladministration and ordered the scheme manager to pay £500 in compensation.
The Ombudsman commonly imposes fines for incorrect quotations, but has clearly stated that incorrect figures do not necessarily confer any rights to the benefits erroneously quoted. The case of Page illustrates this point. The case is also interesting because of the issues surrounding causation. The member had recently been widowed and was quoted an early retirement pension of £2,900 pa but the correct amount that was eventually put into payment was only £1,300 pa. The question was whether she had retired as a consequence of the incorrect quote or whether she had become demotivated already following the trauma of her husband’s death and would have retired anyway. The Ombudsman concluded:
"…I have taken into account the fact that at the time of retirement Mrs Page had lost the motivation to come to work and has not since sought further employment."
The Ombudsman also took into account when making an award for distress the fact that the misquote problem had come at a difficult time for the member. This illustrates how he does look at individual circumstances when making distress awards and is particularly likely to award them (or award a higher sum) when there has been a death affecting the beneficiaries suffering from the maladministration at issue.
The member’s early retirement benefits were misquoted. The Ombudsman’s conclusions are worth quoting to illustrate his approach to establishing loss where the member had found work after retiring form the employer and the fact that he took into account the value of the redundancy benefits received by the member:
"19 Mr Peers gave notice to his employer on the strength of his former employer's incorrect quotation and he has said that that notice was irrevocable. I have received confirmation that that is so. Had he not given notice he could have continued working until his normal retirement age of 60. Fortunately, Mr Peers was able to mitigate the position by obtaining employment with a firm called SGS as an associate inspector and his wife continued working as a part-time Health Visitor. I appreciate that he did not take up work with SGS with a view to mitigating his position but there is nonetheless an expectation that someone in his position would mitigate such losses if possible.
20 On the face of it the detriment to Mr Peers can be quantified as the loss of the amount of additional pension he could have earned if he had retired in pensionable service with BP at his normal retirement date (27 November 2003) based on the salary he would have received had he remained in pensionable service with BP until that date. Alternatively, the quantification could be limited to the difference between the pension he actually received from Gillette and the pension he was led to believe he would receive ie the basis on which Mr Peers was prepared to retire early.
21 Against that must be set the fact that Mr Peers received substantial severance pay from BP when he retired at the time he did. With part of that sum Mr Peers purchased AVCs bringing him a pension of £5,561 per annum. Moreover, he had available to invest a further £30,000 of severance pay. These are emoluments he would not have received had he remained with BP until his normal retirement age and I consider that they must be brought into the equation.
22 I do not doubt Mr Peers' assertion that his decision to take early retirement was a direct result of, and followed very closely in time on, the information he received from Gillette. But that is not the same as saying that he would not have retired had he received the right information from Gillette. While Mr Peers is, of course, worse off than he thought he was going to be, it does seem to me that overall he is likely to have been better off in taking advantage of retiring early with the severance pay on offer than in postponing his retirement. Thus I am not satisfied that he would have decided not to retire early had Gillette provided him with the correct quotation in February 1999.
23 I find that the respondent's offer of £2,000 to Mr Peers is an appropriate sum to compensate him for the time, trouble and anxiety he has experienced in consequence of the maladministration I have identified but, on balance, I cannot conclude that he sustained any additional detriment from that maladministration."
When defending trustees or employers it is worth considering carefully what loss the member has actually suffered, even if they did retire on the strength of an incorrect quote.
2. Calculating the benefit
A common difference in the way in which early retirement pensions are calculated is for actives and deferreds, with actives often getting more generous terms. The following case shows that if a pension scheme is to apply different early retirement factors to actives and deferreds, the rules must clearly permit them to do so. Trustees should review their early retirement wording to ensure that the wording is clear.
The Ombudsman’s analysis was as follows:
"16 According to the Scheme Rules:
‘...the provisions of the Rules regarding retirement before Normal Retirement Date shall be deemed to apply to the benefits payable under [the leaving service rule] in the same manner as they apply to benefits payable to a Member retiring from the Service...’
17 Members retiring from service are entitled to the pension which would have been payable if they had left service
‘...reduced by a percentage calculated on a basis certified as reasonable by an Actuary having regard to the period between the date the first instalment of the pension falls due and Normal Retirement Date, but if the Principal Employer so directs a higher pension will be payable...’
18 The explanation given by Aon of the calculation of benefits on retirement from service (see paragraph 10) is that Standard Life's reduction factors took into account, as well as the period between payment of the pension and Normal Retirement Date, the additional past service reserve for an active member compared with that of a member who had left service. It is in this respect that the two bases for calculation of early retirement differ.
19 In my view the rule does not (as Standard Life reportedly maintain) allow the actuary to take into account whether retirement is from active service or takes place after leaving service. Expressly it only allows the Trustees to use a factor which the actuary certifies as reasonable having taken account of the time to normal retirement date. Whether the member has up to that point had active or deferred status ought not to affect that actuarial advice which ought to be based on what the cost to the scheme will be of allowing early payments of his or her benefits.
20 The rule does, however, permit the "Principal Employer" (the RZSS) to increase the pension payable on retirement from active service. It is clear that both the Trustees and the RZSS knew what figures were quoted to Mr Blair as relevant to retirement from active service. Neither has sought to say that the higher early retirement factor would not have applied if properly advised by Standard Life that there was an implicit decision by the RZSS to increase the early retirement pension contained in the use of a more generous factor. Even if my reading of Rule 6B(3) is wrong the effect is the same; Mr Blair would have been treated more generously on early retirement from service than he would be if he drew his pension later. The Trustees accept this.
21 I have considered the two legal judgments to which the Trustees have referred. In both those cases the employee would have been able to work out for himself, from the available information, that an alternative course of action would have been more beneficial to him than the course he followed, although it would perhaps have been easier for the employer and pension scheme administrator to have worked this out.
22 In Mr Blair's case, he was unable, from the information available to him, to deduce for himself that the pension quoted would not be available to him at a later date. I have seen no evidence of any publicity given to the decision in 1997 to accept advice which in effect meant that a higher pension was to be available on early retirement from active service.
23 The failure to put Mr Blair in a position where he could have made a properly informed choice was maladministration.
24 Had he known, the balance of probabilities is that he would have taken his pension from the date that he left service (albeit a month later than the original quotation date). Had he been aware of the difference that deferring his pension made this would have outweighed his hope that his health might improve to allow further employment. His decision to defer payment of the pension decision made sense in the context of two pensions whose value was the same. It would not have been the likely decision where one was of greater value than the other. Thus as a consequence of the maladministration I have identified Mr Blair was not able to take a decision which would have been to his financial benefit and thus injustice has been caused by the maladministration. I am making a direction to redress that injustice.
25 Mr Blair has argued that the use of the word "guaranteed" in the quotation provided for him in March 2000 gave him rights to equivalent benefits at a later stage. I think it was sufficiently clear that the guarantee applied to the figures shown on the retirement date of 31 March. I differ from Mr Blair in that I do not think that the Trustees bound themselves to that particular figure.”
The following case went the other way.
The member received a written quotation for an immediate pension to commence on 30 November 1998, when his employment with the company was due to cease. On 14 December 1998, he received a quotation for a deferred pension at age 60. Two years later, he requested an updated quote, which was much lower than that quoted in December 1998.
The member argued that no information was provided that indicated that the retirement factor explained in the Plan booklet would not apply to a deferred member. The Ombudsman’s analysis was as follows:
"17 The Plan booklet stated that a member's pension would be reduced by 4% for each year between the ages of 55 and 65. There was nothing in the booklet to indicate that this reduction applies only to members retiring early from active service. Therefore, it was not unreasonable for Mr Conniss to have believed that this reduction would apply in his case. However, it is the Rules and not the booklet that governs entitlement under the Plan.
18 The 1992 Rules, applicable at the time Mr Conniss left the service of the Company, provide that it is for the Trustees to decide, subject to confirmation by the actuary as reasonable, the reduction applicable for a member retiring early from service with the company. There was nothing in this document to indicate the reduction that would apply for deferred members. The 2000 Rules provide that in respect of deferred members the Trustees will decide the amount of pension payable, and the actuary will calculate the benefit payable. Therefore, there is nothing in either the 1992 or 2000 Rules that states specifically the rates of reduction that should be apply in the case of deferred members under the Plan who take their benefits early. The reduction applied is at the discretion of the Trustees and confirmed by the actuary. Mr Conniss is critical of the fact that prior to his retirement there seems to have been no policy or procedure for detailing what reduction should be payable but I do not see that as a cause of injustice to him.
19 It is true that Mr Conniss had not been informed at the time he left the service of the Company, that 4% per annum reduction only applied if a member retired early from active service. However I do not accept that this is a failure on the part of the Trustees to inform him of his benefits under the Scheme. Mr Conniss had been informed at the time he left the service of the Company of his benefit options. He had also been given a quotation of the estimated pension payable at age 60. Mr Conniss did not query how his pension at age 60 was calculated and the Trustees were not under any duty voluntarily to provide this information.
20 Mr Conniss stated that he had based his decision to defer taking his pension on the quotations he received in 1998. The pension quoted to Mr Conniss in 1998 was stated to be an estimate of the pension he would be paid at age 60. That estimate assumed a rate of inflation for the period between the date he left service and his 65th birthday, 10 October 2006. The main reason for difference between the figures provided to him in 1998 and those he received in 2000 was that inflation had for the two intervening years been lower than had been assumed in that estimate. The rate of inflation at the time he received his quote of 14 December 1998 was 2.8%. (The rates of inflation have not exceeded 5% to date). Because of this Mr Conniss was quoted a lower amount than he had been quoted two years earlier. I cannot see that he would have been helped had fuller information been provided in the booklet or at the time the quotation was given to him.
21 Mr Conniss claims that some of the statements made in Mr MacIntyre's letters quoted in paragraphs 11 and 12 are incorrect and others are a matter of opinion. I do not entirely agree with this claim. I agree that Mr Conniss was not specifically told that early payment of deferred pensions are calculated differently. However, if he had queried the calculation of the 1998 figures he would have realised that it was not the same as the basis that would have been used to calculate early retirement from active service.
22 Whether or not Mr Conniss asked for a written quotation at the time he left (I note the statement from Cameron McKenna that he did not) he certainly received one but decided not to pursue that option at the time.
23 Mr Conniss has stated that he is not certain whether or not he was given misleading information in 1998. There is no evidence which leads me to believe that he is not receiving his correct entitlement.
24 For the reasons given above, I do not uphold Mr Conniss' complaint against the Trustees."
Therefore the wording in the rules clearly allowed the trustees to apply a retirement factor of their choice. This was crucial to the decision, and differentiates it from the Blair case above.
Claims are often brought to backdate payment of benefits. It is often claimed that payment should be made from the date of the application. The Ombudsman has held that (depending on the terms of the scheme rules) payments should be made from the date that the trustees/employer has sufficient evidence to make the decision. This is sometimes the date of the application and sometimes much later (especially when there is conflicting medical evidence).
The Ombudsman refused to backdate payments to the date of the application. The scheme rules required that both the employer and the trustees needed to be satisfied that the medical condition permanently prevented the member from following his normal employment or seriously impaired his earning capacity. The Ombudsman said the payments could only be backdated to the point at which the trustees and the employer had sufficient evidence to draw this conclusion.
He also made the following observation which shows that once trustees have a pretty clear indication of the medical opinion they should get on with matters to avoid the member suffering from needless delay:
"By the time of the third meeting held on 23 November 2001 the GP had provided a further medical report which in my mind did appear to confirm that Mr Welch was no longer capable of work through continuing ill health. I cannot agree that there is any ambiguity in that report as recorded by the trustees in the minutes of that meeting. There was no need for them to seek further clarification, which only prompted an unnecessary delay until they decided in Mr Welch's favour on 15 May 2002. However, the employer and the Trustees have offered Mr Welch an IHER from 13 September 2001 and this overcomes the criticism I have in mind."
The member would have received a higher level of benefits if the decision to pay her ill health benefits was made before her 60th birthday. The Ombudsman held that there was unreasonable delay in making the decision and that the trustees had not handled the case with sufficient urgency. Therefore, he ordered that the trustees pay the benefits that would have been payable had the decision been made before her 60th birthday.
4. Ill-health cases and decision- making
Medical advice should be sought where necessary when dealing with incapacity cases. It is very important to ensure that the medical practitioner is asked the right questions; this is a common failing which the Ombudsman has highlighted recently.
As long as there is enough evidence to support the decision made by the trustees/employer, the Ombudsman will not challenge it. The following case illustrates this.
The Ombudsman reviewed the way that the decision-maker had dealt with the medical evidence obtained as follows:
"As is not uncommon, the various medical opinions which have been obtained by one or other party are not unanimous either as to the diagnosis or, more significantly as to the prognosis… For the decision maker to favour one doctor's opinion over that of another is not in my judgement evidence of any perversity in the decision, but simply represents the weighing of one set of evidence against another."
This is reassuring to trustees who very often get conflicting evidence and have to weigh each piece against the others, and in practice often feel they need to keep getting more and more evidence until something sounds definitive one way or another, which of course often cannot be achieved with many medical conditions.
To qualify under the rules for ill- health early retirement, the member needed to show that his ill-health incapacitated him permanently from doing his “ordinary work”. The Ombudsman did not accept the trustee’s argument that ordinary work meant work of a similar grade, status and salary including, for example, supervisory or clerical work. He said that the member’s job as a process operator (which involved lifting weights) is significantly different to a supervisory or clerical job.
This case shows that the ombudsman interprets “ordinary” work narrowly to mean the same kind of work on a physical basis. Another aspect of the case was the member’s obesity. The Ombudsman had this to say about this aspect:
"The Trustees assert that the nature of Mr Curzon's obesity is integral to the issue of permanence because a "lifestyle" problem can change in the way that a congenital disorder might not…
31 In Mr Curzon's case, therefore, the Trustees should have asked themselves whether his condition in 2000 was such that he was unlikely to be able to return to his former jobordinary work either permanently or for an indefinite period. In December 1999 Mr May did not believe that Mr Curzon would be able to work in any capacity of a physical nature as he did before. Dr Page was of the opinion that Mr Curzon was unfit for the foreseeable future to undertake his ordinary work. She went on to say that, if he were to lose weight to a level where surgical intervention were possible, it was more likely than not that, in view of his long term disability, the prognosis would not be good. However, Dr Page then asked the Trustees if they were happy to award a benefit 3 pension to an individual who had a health problem which in the absence of obesity (a lifestyle one) could be treated.
32 I am not persuaded that this is a question the Trustees should have been asking themselves. Dr Page had conceded that, even if Mr Curzon were to receive surgery, his prognosis was not good. Even if the Trustees had been convinced that surgery would enable Mr Curzon to resume his ordinary work, they still needed to ask themselves how feasible it was for Mr Curzon to achieve the kind of weight loss that would enable surgery to go ahead. There is no evidence that they did so. What they could not do was set aside the question of Mr Curzon's obesity in the way Dr Page suggested. Mr Curzon's weight is part and parcel of his "condition" and should be treated as such. The Trustees insist that they only took Mr Curzon's obesity into account insofar as it impacted on the permanence of his condition and yet, as I have said, there is no evidence that they explored the feasibility of his losing weight. This leaves me with considerable misgivings about the Trustees' attitude to Mr Curzon's obesity.Dr Page's description of Mr Curzon's obesity as a "lifestyle one" implies that this is a self inflicted condition which the Trustees might set aside. There is nothing within Rule 18 which says that, if the member is suffering from a condition which his lifestyle may have contributed to, he is not eligible for an incapacity pension."
The case was unsuccessfully appealed by the trustees to the High Court (in Saffil Pension Scheme v Curzon  EWHC 293 (Ch)).
In this case the Ombudsman considered the decision to reassess the award of the ill-health pension (in accordance with a power to do so under the scheme rules) and, in particular, the use of surveillance video evidence, as follows:
"The Trustees commissioned a surveillance report from a private investigator which was sent to the Scheme Manager on 22 August. The purpose was to elicit whether or not Mr Jukes was in paid employment. The private investigator observed Mr Jukes driving a minibus for a local firm and took a video film of him engaged in this activity, which I have seen…
I have taken careful account of the report of the private investigator who discovered that in all likelihood Mr Jukes had found some alternative employment. This seems to have carried great weight with the Trustees. They should in my view have invited Mr Jukes to see that report and to comment on it. The Trustees seem to have failed to realise that minibus driving was not similar employment to that which Mr Jukes had with the company. It may well have been employment of the light duties kind envisaged by Mr Giddings."
In this case the decision whether to grant the incapacity pension was a ‘discretion’ under the scheme rules as opposed to a question of fact, because the member was deferred and there was no specific incapacity pension rule for such members. It illustrates the dangers of taking on such a discretionary exercise; often it would be simpler not to investigate the matter at all. The Ombudsman reviewed the matter as follows:
"The Secretary said that a recent review of the Scheme's funding level revealed a small deficit on the Minimum Funding Requirement (MFR) basis. This, he said, meant that the Company's contribution to the Scheme was likely to almost treble. The Secretary also said that, if the Company were to award Mr Gabbitas an immediate pension, not only would it increase the Scheme's liabilities but it might also create a precedent that could further exacerbate the situation in future.
The Trustees say that the Rules do not allow them unilaterally to pay Mr Gabbitas a discretionary pension. KCL say they decided not to approve the payment of a discretionary pension for a number of reasons;
-The award of such a pension would create a significant additional Scheme liability when there is already a small MFR deficit,
-The Scheme has experienced investment returns considerably lower than had been assumed,
-Owing to demographic changes (principally increased longevity of Scheme beneficiaries) liabilities are greater than had been assumed previously,
-They had obtained further medical evidence confirming that in November 1999 it was likely that Mr Gabbitas would regain sufficient fitness to return to work before his normal retirement age and that there had been no suggestion that this did not remain the case. KCL refer to Dr Fernandes' reply to the legal adviser and to two articles he subsequently provided for them from the British Journal of General Practice dated May 2002. The articles ("Doctors and social epidemics: the problem of persistent unexplained physical symptoms, including chronic fatigue" and "Myalgic encephalomyelitis - the dangers of Cartesia") were critical of the report to the CMO.
The Trustees and KCL provided a copy of the April 2000 actuarial valuation and said that, at a Trustees' meeting in October 2002, the actuary had advised that the funding position had worsened. They said the actuary had advised that the MFR funding position was around 97% and that it is likely to have worsened since then because of adverse investment conditions and demographic factors.
The Trustees and KCL say that the actuary has advised that the actuarial cost of providing an Incapacity Pension for Mr Gabbitas would be around £250,000. They go on to say that, if the Scheme were to be wound up, the changes announced in the recent White Paper, would mean that the cost of buying out the pension would be considerably more than the estimated on-going cost. They acknowledge that there is no plan to wind up the Scheme and say that KCL itself is financially sound. They then say that, if the Scheme were to be wound up and KCL were insolvent, Mr Gabbitas would gain priority over other classes of beneficiaries, if he had been awarded a pension and become a pensioner.
KCL also say that they considered the extent to which granting a pension might create a precedent, or at least an expectation, among the Scheme's members in the future.
…I am also unconvinced by the financial arguments they put forward. The information provided about the 2003 actuarial valuation suggests that the past service liability has increased to approximately £402.6 million, compared with £326.8 million in 2000. This represents an increase in the liabilities of £75.8 million, which unfortunately coincided with a downturn in the value of the Scheme's assets resulting in a past service deficit. I have no quarrel with an employer (or a trustee for that matter) having some consideration for the financial circumstances of a scheme when exercising a discretion. However, the cost of providing Mr Gabbitas with an ill health pension (£250,000) represents 0.3% of the increase in the past service liabilities since 2000. I would not call this a "significant" increase in liability…
As for the creation of a precedent, the granting of a pension on the grounds of ill health and incapacity is not likely to create such a precedent because each case, by its nature, must be considered on its own merits. Expectation, as opposed to precedent, can, of course, be managed with the appropriate communication and information.
There is, of course, an argument that there was no absolute requirement for KCL and the Trustees to consider Mr Gabbitas under Clause 34. I would not disagree with this but I would say that, having undertaken to do so, it behoved them to give his case proper consideration. It is not for me to substitute my opinion for KCL's or the Trustees' in the exercise of their discretion under Clause 34. Even if I could, I would find myself in the same position of lacking sufficient evidence to come to a suitable decision. I can, however, ask them to reconsider their decision with the benefit of appropriate medical evidence.”
He ordered the trustees to obtain further medical evidence and reconsider whether they should grant a pension on an enhanced basis to the member (plus awarded £200 to the member for distress).