Pensions Ombudsman determination on payment of discretionary benefits

In the following determination from CAS-86492-T9Z3 of 1 August 2023, the Pensions Ombudsman decided that benefits must be paid in accordance with the Trust Deed and Rules and in the event of any discrepancy, the Trust Deed and Rules prevail. There is no legal requirement to use a surplus to pay discretionary benefits.

Trustees and employers however need to watch this space because the Government is currently analysing the feedback from their consultation* on surpluses in private sector defined benefit schemes. Some commentators have argued that the Government should require scheme surpluses to be used to satisfy members’ reasonable expectations of discretionary benefits before any return of surplus to the employer.

*The consultation is called “Options for Defined Benefit schemes”. It ran from 23 February 2024 until 19 April 2024 and the outcome is yet to be published.

What happened?

Mr N was a member of Sotheby’s Pension Scheme (Scheme). He complained to the Trustees and then the Ombudsman that his pension accrued prior to 6 April 1997 in excess of Guaranteed Minimum Pension (Pre 97 Excess Pension) no longer received increases in payment, following the purchase of a bulk annuity policy with an insurer and the wind-up of the Scheme.

Outcome

The Ombudsman did not uphold Mr N’s complaint. The Ombudsman found no evidence that the payment of the increases was ever guaranteed or that Mr N was given misinformation but even if there had been, the Trust Deed and Rules must prevail.

Summary background

• In 2018 the Trustees purchased a bulk annuity policy in respect of the Scheme’s pensioner liabilities from an insurance company. Pension increases to the Pre 97 Excess Pension were not included in the policy as of right.
• In 2022, the principal employer triggered the wind-up of the Scheme. It said there would be no further discretionary increases applied to pensions in payment. Mr N received an individual policy in his name.
• Mr N complained to the Ombudsman. He argued, broadly, that the Pre 97 Excess Pension made up most of his entitlement from the Scheme and this element of his pension would no longer keep pace with inflation. Mr N was also concerned that a surplus should be used to fund the increases to his Pre 97 Excess Pension, instead of being returned to the principal employer.
• The Trustees‘ position was, broadly, that the policy with the insurance company was arranged on the basis that all future pension increases required, as of right under the Trust deed and Rules and legislation, would continue to be paid. This represented Mr N’s legal entitlement to the benefits that were due to him. Any increases to Mr N’s Pre 97 Excess Pension had always been discretionary with the consent of the principal employer.
• In a similar complaint in relation to the Scheme by another member Mr Y and with a similar outcome, the Ombudsman Adjudicator stated, “There was no legal requirement for the surplus, if there was one, to be used to provide Mr Y with benefits over and above those he was legally entitled to.”.  Mr Y also made an additional point that an imminent sale was being overseen by the principal employer. He considered that a percentage of the commission of that sale could be set aside for the benefit of the Scheme’s pensioners. The Adjudicator did not accept Mr Y’s additional point.

If you require legal advice on payments of discretionary benefits in pensions, contact our Pensions team.