The Pensions Ombudsman (TPO) has given his determination in a complaint by Mr R against Abbey Life Assurance Company Limited (Abbey Life), and has decided that a member had no good defence to a pension scheme's demand for repayment of tax-free lump sum overpayments given he spent the money partly to pay off debts, partly after he became aware of the mistake and partly on expenses that he might have incurred in any event.
Mr R was a member of the Mayfair Construction Ltd Executive Pension Plan (the Plan) and the Mayfair Construction Ltd Directors and Executives Retirement Plan (the Executive Plan).
Between July 2010 and January 2012, he received benefit statements from the schemes' administrator, Abbey Life, which showed he could take a tax-free lump sum of up to around £20,000 from the Plan and £5,000 from the Executive Plan.
Following an enquiry by Mr R's financial adviser, Ms Evans, as to whether Mr R's salary would enable larger lump sums, Abbey Life issued a revised quotation on 21 August 2012, stating that the whole of the first fund could be taken as a tax-free lump sum of £73,532.58 and the second as a lump sum of up to £13,234.19 with a small yearly pension. Ms Evans did not query the lump sums and recommended to Mr R that he should take them. Mr R did this, receiving a total lump sum of £87,064.68.
On 11 March 2013, Abbey Life informed Mr R that due to “human error” a database had been updated with the wrong figures and the maximum tax-free lump sums in the August 2012 quotation should have been £18,383.15 and £11,606.84. Abbey Life asked Mr R to repay the total overpayment of £56,966.78. Mr R responded on 1 April 2013 that the “money has been spent” and contacted the Pensions Advisory Service (TPAS). In January 2014, he told TPAS he had used the money to pay off £51,470.47 in credit card debts, as well as to buy a car (£13,750), take two holidays with his wife (£4,600), help with his daughter's removal costs (£750), repair his roof (£2,452) and pay living expenses.
However, on examining Mr R's bank statements, Abbey Life said they showed that a significant of money was still held at the beginning of 2014 and a large number of cash withdrawals had been made later, casting doubt on his claim of 1 April 2013 that the money had already been spent. Abbey Life concluded that Mr R had not been open and transparent in his dealings with it. Nonetheless, Abbey Life offered to offset the overpayment amount by £5,000 as a goodwill gesture.
Mr R complained to TPO that he should not have to repay the overpayment as he had relied on the August 2012 quotation and subsequent payments in spending the money. He also argued that he relied on Ms Evans' advice that he could take the lump sums and said that she had told him the increased amounts were related to his wife's ill health. He was now concerned he might become bankrupt.
The matter, as usual, was considered first by an ombudsman adjudicator in TPO’s office. TPO dismissed the complaint, noting that he agreed with the ombudsman adjudicator's initial opinion, which Mr R did not accept.
The adjudicator’s opinion was that, under the general principles of restitution, Mr R must repay the overpayments unless he had a valid defence of change of position. For this defence to apply, Mr R would need to show that he had changed his position, acting in good faith, in reasonable reliance on the incorrect information.
Although Mr R had used most of the money to repay his credit card debts, it was settled case law that repayment of a debt did not count towards a change of position. It was also possible that he would have incurred the expenditure cited in relation to the remainder of the money even if he had not received such a large lump sum. The adjudicator therefore found that he had not changed his position in that regard either.
In addition, on the issue of whether Mr R had acted in good faith, the adjudicator noted that his bank statements, which he did not disclose until 2014, showed that there was still over £43,000 in his account at the time he was informed of the overpayment, although he told Abbey Life all the money had been spent. The adjudicator therefore decided that Mr R had “not shown equitable grounds for him to avoid making repayment”.
However, the adjudicator also noted that given Ms Evan's advice and the earlier discussion about whether the lump sums could be increased, it was not unreasonable of Mr R not to have queried the August 2012 quotation at the time.
In reaching the same conclusion as the adjudicator, TPO considered both the possible change of position and whether Mr R had any claim of negligent misstatement against Abbey Life. A member was only entitled to benefits at set out under the scheme rules, but TPO would provide redress, broadly, if it could be shown that financial loss or non-financial injustice flowed from the incorrect information given. The member must also have relied on the incorrect information to his detriment and it must have been reasonable for him to have done so.
TPO noted that Mr R's bank statements showed that a car purchase was not completed until 22 April 2013, and (TPO held) Mr R incurred the expenditure claimed either after he knew about the error or that it was expenditure that he might have incurred even if the overpayment had not been made. The £5,000 already offered by Abbey Life partially to offset the overpayment was ten times the minimum that TPO currently awarded for non-financial injustice and it was found to be satisfactory compensation in the circumstances for any anguish and pain suffered by Mr R.
This case sets out clearly the actions that pension scheme trustees or administrators need to take in investigating the circumstances surrounding an overpayment before demanding repayment.
While it is sometimes considered that recipients of overpayments may be better off spending the monies received, rather than saving them, this determination highlights that matters are not always that simple.
The case has confirmed that the repayment of debts (such as credit card bills in this instance) will not amount to a sufficient change of position in law. It is not considered to be a detriment to the member to pay off a debt which would have to be paid off sooner or later. Secondly, since a change of position defence is an equitable remedy, the recipient of an overpayment must be seen to be entirely open in his dealings with the administrator or trustees. Acting otherwise may cast doubt on the issue of the member's good faith.