Overview

TPO has upheld a complaint against an employer and trustee for their respective failures to provide “mirror” benefits to a member following his transfer to a new scheme despite pre-transfer commitments to do so.

Facts

Prior to the transfer

Mr H was a member of the Olsy Pension Scheme (the “Previous Scheme”). He was entitled to “special terms” benefits which were more generous than the standard benefits offered to members. On 1 January 1996, his employment was transferred to the entity currently known as Olivetti UK Limited (the “Employer”) as part of an internal reorganisation.

On 24 June 1996, Mr H received a letter from his previous employer informing him a decision had been taken in principle to transfer his benefits from the Previous Scheme to what is now known as the Olivetti UK Limited Pension and Life Assurance Scheme (the “New Scheme”).

A number of announcements were sent to all members of the Previous Scheme concerning the new benefits that would apply from 1 January 1998 if members joined the New Scheme. It is understood that Mr H received those announcements. An announcement dated November 1997 stated: “Your pension earned from 1 December will be increased in line with inflation subject to a maximum of 5% pa. The pension earned up to 30 November 1997 will receive increases in the same way as the existing pension scheme” and a Memorandum dated 28 November 1997 stated that Mr H’s benefits in the New Scheme would “mirror” those under the Previous Scheme.

SBJ Benefit Consultants (the employer’s benefit consultants) (“SBJ”) were engaged to prepare a report comparing the benefits provided under the Previous Scheme and the New Scheme. The report illustrated that, under the Previous Scheme, pension increases were in line with RPI subject to a maximum of 5%. Increases in the New Scheme were stated as fixed 3% increases for pre-6 April 1997 pensionable service following an announcement made to existing members in 1997, although this announcement was never documented by formal rule amendment.

On 22 December 1997, SBJ sent a letter to Mr H confirming that on transferring his membership to the New Scheme, his accrued and future pensionable service benefits would mirror those that would have been available to him under the Previous Scheme. Mr H proceeded to sign an application form for membership of the New Scheme and agreed to transfer his past service benefits in the Previous Scheme to the New Scheme.

Post-transfer

Mr H resigned from employment with the Employer with effect from 10 June 1998. He was issued with a leaving statement which reflected that the excess pension over his GMP would be increased by RPI up to a maximum of 5%. The remainder of the leaving statement was consistent with Mr H’s benefits “mirroring” his entitlement under the Previous Scheme.

Mr H opted to take his benefits in 2014 and was given a retirement quotation on 14 August 2014. The administrator wrongly assumed he had always been a member of the New Scheme and applied fixed 3% increases to his excess pension over the GMP matching the increases that (non-transferred) New Scheme members received. There were also other errors in the calculation.

Counsel’s Opinion

 In or around 2015, the trustee of the New Scheme sought advice from Counsel on how it should be administering the New Scheme. Concluding that the New Scheme’s rules had never been validly amended, Counsel found that all its members were only entitled to statutory increases.

An announcement was made by Quantum Advisory on 22 May 2017 informing members that following a review of the New Scheme rules, it had been determined that the revaluation of pensions in deferment, equalisation of pension benefits and increases to pensions in payment had not been granted in accordance with the New Scheme rules. Quantum Advisory told members that it had recalculated pensions on the correct basis and that in many, but not all, cases members had been overpaid. As a result, pensions were to be frozen at their current rate unless or until the current pension exceeded the corrected pension (the “Quantum Announcement”).

Mr H had not been overpaid (due to an error in the revaluation of his pension), but was still told he would not receive any further increases to his pre-6 April 1997 benefits other than to his GMP once in payment.

Mr H complained to TPO regarding this decision.

Decision

TPO concluded that there was an enforceable contract between the Employer and Mr H to procure that Mr H was offered membership of the New Scheme on terms mirroring his membership of the Previous Scheme, including in relation to past service benefits if transferred. On the balance of probabilities, TPO found that the terms to be “mirrored” included LPI increases (RPI capped at 5%) to benefits attributable to Mr H’s pre-6 April 1997 service.

TPO held that the employer was responsible for maladministration and a breach of law for:

  • failing to procure that Mr H was entitled to mirror benefits in the New Scheme following the contractual commitment given by the Employer when Mr H agreed to transfer his benefits from the Previous Scheme to the New Scheme; and
  • failing to document these benefits for years and seeking to avoid those commitments once the error had been discovered in breach of contract.

It also found that there had been breach of trust (but no maladministration as the Trustee took and followed legal advice) by the Trustee in:

  • failing to grant the benefits promised in return for the transfer payment made in respect of Mr H under the transfer-in rule in relation to the period on or after 22 May 2017 and
  • failing to administer the New Scheme in accordance with the New Scheme rules in relation to the period after 22 May 2017 in respect of the transferred in benefits.

Comment

TPO’s decision highlights that promises given to members can become contractual entitlements even if the governing documents of the scheme are never amended. If promises are given to members about benefits during a transfer process, these should be clearly documented to avoid future confusion over entitlement.