A recent Pensions Ombudsman decision reminds us that death benefit decision-making can often be a tricky area for trustees and employers to navigate. The Pensions Ombudsman has already made 23 determinations in relation to death benefits in 2018, the topic typically representing around 1 in 10 cases he hears each year.
In Mrs S PO-17636 (July 2018), Mrs S challenged a decision of the trustees of the Canon (UK) Retirement Benefit Scheme (the Trustees) to pay the entirety of a death-in-service lump sum from the Scheme, alongside the dependent's pension, exclusively to her children. Although Mr and Mrs S were separated and living apart, the complaint was upheld against the Trustees who failed to demonstrate that they had given proper consideration to the continued financial interdependency between them at the time of his death. It was acknowledged that the Trustees had correctly given consideration to Mrs S as a potential beneficiary, had taken legal advice and had made attempts to consider all of the relevant information. This decision demonstrates just how difficult it can be for trustees to ensure that they turn their minds to the correct factors when making death benefit decisions.
Facts of the dispute
- Mr S died in service in 2016. He left no will. He had accrued pension death benefits in both the final salary and the CARE sections of the Scheme and a lump sum worth nearly £230,000. He had completed a nomination form in 2004 naming Mrs S as the sole beneficiary
- Mr and Mrs S separated in 2011. At the time of his death, Mr S was living in the former family home with their children while Mrs S was living in rented accommodation but sharing the care of the children. Neither of them could afford to buy the other out of their joint mortgage. Mrs S informed the Trustees that Mr S had cancelled his life assurance on the basis that the scheme benefit would pay off the mortgage in the event of his death. Following the death, one child lived with Mrs S while the other was looked after by Mr S's parents
- Under the rules of the Scheme, the Trustees had an absolute discretion as to how to distribute the lump sum. Following a number of discussions with Mrs S, they wrote to Mrs S explaining that they had decided to divide the lump sum equally between her two children for the reasons that, amongst others:
- Circumstances had changed considerably since the nomination form – the document was a guide only and did not fetter the Trustees' discretion
- Mr and Mrs S were living independently. The children were dependent on the deceased but no dependency or interdependency with Mrs S had been established and, in any event, would not be deemed to override the children's dependency
- Mrs S appealed the decision on the basis that she and Mr S shared full and equal parental responsibility for the children and they had ongoing joint liabilities. She argued that she was now responsible for Mr S's inherited personal debts as they had never divorced as well as the full outstanding mortgage. Nevertheless, the Trustees upheld their original decision.
The Deputy Pensions Ombudsman (the Ombudsman) recited the well-known test in Edge as applied to the exercise of discretions of this type by trustees ie the duty to show that they gave proper consideration to all relevant matters and excluded irrelevant matters. In doing so, trustees cannot be criticised for preferring the claims of one interested party over another.
In this case the Ombudsman decided that, on the evidence available to them, the Trustees erred in their decision that there was no interdependency between Mr S and Mrs S. This was clear from the undissolved marriage, the shared mortgage and the joint responsibility for their minor children. It would however be for the trustees to decide what weight to give to the interdependency and the decision was remitted back to them. Mrs S was awarded £500 for distress and inconvenience.
This determination demonstrates the risks inherent in death benefit cases where there are competing potential beneficiaries. Any trustee or employer exercising a discretion to pay out a death benefit needs to follow a robust decision-making process which thoroughly gathers and weighs all of the evidence. Payments made in error can be difficult to recover, disputes can be costly for trustees and employers to defend and a considerable drain on time and resources. As acknowledged by the Deputy Pensions Ombudsman in this case, such situations can also be very fraught and distressing for family members.
Steps to minimise risk of challenge
To ensure that a robust process is followed, many trustee boards delegate death benefit decision-making to a committee. Before doing so, the scheme governing documents must contain (or be amended to introduce) a power to delegate. We recommend that the committee puts in place a Terms of Reference to clearly define its role, remit and the process it should follow when a death occurs. In this way, the Terms of Reference are a useful framework and go some way to mitigate the future risk of challenge to any decision made, covering areas such as:
- the categories of member entitled to benefits and details of those benefits
- the process following a death including investigation and information gathering to identify the potential recipient(s), the decision-making process, communicating decisions and record-keeping
- the committee's relationship with the trustee board, including monitoring of the committee's performance, and which decisions, if any, should be remitted to the trustee board
- the structure and operation of the committee
- the complaints process, and
- data protection issues.
It is also important that all trustees have the relevant knowledge and understanding in relation to any discretionary decisions under their schemes. As this case shows, the devil is often in the detail.
As well as being able to put in place Terms of Reference for you, your usual Womble Bond Dickinson pensions contact would be happy to discuss any additional training needs you may have.