The Pensions Ombudsman’s position on recovery of pension overpayments

What happened?

Increases to pensions in payment had not been validly granted.  As a consequence, member benefits had been overpaid.  The trustees decided to recover the overpayments by reducing future pension payments. This method of recovery is called ‘recoupment’ and can only be used if it is fair and equitable to do so.

Members contested the recovery of the overpayments by bringing claims before the Pensions Ombudsman.  One of those complainants was Mr E who received overpayments in the sum of nearly £91,000 over a period of 24 years.

Outcome

The Ombudsman determined that Mr E should retain 93% of these payments and only the remaining 7% could be recovered by the trustees by way of reduction to Mr E’s future pension instalments (subject to the trustees obtaining a Court Order). Mr E was awarded £1,000 for non-financial injustice.

The Ombudsman noted that:

• affordability for the member is a relevant consideration in establishing the period of recovery of overpayments.
• affordability should be revisited if the member is able to demonstrate in the future that the rate of recovery is no longer affordable.

Key considerations for trustees

• The starting point is that it is the trustees’ duty and not inequitable to seek to recover the overpayments and thereby increase the assets available for the benefit of all the members.
• That said, prospects for recovery of overpayments are specific to the facts of the overpayment and the overpaid member’s individual circumstances. Trustees will need to consider whether there has been ‘detrimental reliance’ by the member and assess their ability to make repayments. Trustees must ensure that all possible defences to the recovery of overpayments are considered if the member complains via the scheme’s Internal Dispute Resolution Procedure.
• Trustees can seek to recover the monies directly from the member under the unjust enrichment remedy of repayment of money paid by mistake and / or by way of reduction of future pension payments under principles of ‘equitable recoupment’.
• In order to reduce future pension payments (assuming the member contests the recovery but the Ombudsman decides in the trustees’ favour), trustees must obtain a Court Order authorising commencement of the reduction to the future pension payments. The appropriate County Court is the one nearest to the member and the application is normally dealt with by paper as opposed to a hearing.
• It is generally not reasonable for trustees to attempt to recoup from the estate of a deceased member.

What’s next?

The King’s Speech (17 July 2024) confirmed that a Pension Schemes Bill includes measures to reaffirm the Pensions Ombudsman as a competent court, thereby removing the need for trustees to apply to the Courts to enforce Ombudsman determinations in relation to the recovery of overpayments. At the time of writing, the current procedure of obtaining a Court Order must be followed.