The Pensions Ombudsman (PO) has given his determination in a complaint by Mr N against Dundee City Council and the Scottish Public Pensions Agency.
The PO found that there was no breach of the duty described in Scally by the employer of a member who opted to stop contributions to the Scottish Teachers' Superannuation Scheme (the Scheme) after 40 years of pensionable service, with the result that a much reduced death benefit was payable on her death less than a year later.
Mr N's wife, Mrs N, was employed by Dundee City Council from 1971 and was a member of the Scheme, administered by the Scottish Public Pensions Agency (the Administrator). In November 2012, she opted to end her contributions as she had 40 years' pensionable service, which she believed was the maximum under the Scheme. The opt-out form contained a declaration that the member had read “the guidance” and knew the potential benefits available. Under a section headed “Why should I be a member of the Scheme?”, there were six points, one of which stated the Scheme would “pay a death grant if you die before you retire and may also pay children and dependants' pensions subject to qualifying service”.
Mrs N remained a council employee until her death on 17 October 2013, but this was not treated as death in service by the Administrator in calculating the £67,453 death benefit from the Scheme. The Administrator cited the Teachers' Superannuation (Scotland) Regulations 2005 (the 2005 Regulations), which provided that the death benefit payable in respect of a deferred member such as Mrs N was only 3/80ths of pensionable salary multiplied by the reckonable service completed. If Mrs N had kept up contributions as an active member, under the 2005 Regulations Mr N would have received a death in service grant equal to three times her pensionable salary, totalling £132,063.
Mr N's subsequent complaint under the Scheme's internal dispute resolution procedure was rejected by the Administrator. The Administrator also said it had written to Mrs N in January 2013 to say the maximum pensionable employment was 45 years and she could rejoin the Scheme if she wanted, although Mr N denied she received the letter.
Mr N complained to the PO that his late wife, who was already ill when she stopped her contributions in 2012, would not have become a deferred member if the council or the Administrator had told her this would greatly reduce any death benefit. He claimed that the opt-out form had led her to believe the death grant would remain unchanged and that a council employee had told him after her death that under its normal practice, the council should have contacted Mrs N to explain the implications of opting out, given her 40 years' service. Mr N also argued that the council had breached the employer's duty outlined in Scally v Southern Health Board  (Scally) and later applied in the PO case of Bennett, the determination in which was published in April 2016.
Scally and Bennett decisions
In Scally, the House of Lords came extremely close to deciding that there is a duty on employers to advise in respect of pension rights and benefits. The case involved a group of junior doctors who were members of the NHS pension scheme. Under the scheme, members had a right to purchase additional years' service on beneficial terms, which then enabled them to obtain enhanced pensions. However, this right had to be exercised within a short period of time, or else the terms became less beneficial. The doctors argued that they had not been informed about their right and therefore had been disadvantaged.
The House of Lords concluded that, in the specific case, it was appropriate to imply a term into the doctors' employment contracts that the employer would take reasonable steps to inform the doctors about their rights. However, the Court did not go as far as stating that the employer had to give advice to the members about the exercise of their rights.
In the April 2016 case of Bennett, the PO determined that an NHS employer breached its implied Scally duty by failing to inform a new employee in 2000 of the 12-month time limit from joining the NHS scheme for transferring in benefits on a favourable public sector transfer club basis.
The PO upheld a complaint as against the employer's successor, the Department of Health, by a member who was refused a transfer club transfer in 2011, ten years after the time limit expired. The PO held that the conditions for establishing the contractual duty described in Scally were met and that the employer breached this duty as it did not take reasonable steps in 2000 to inform its employee of a contractual term in order for her to take advantage of it. In particular, he found that although a scheme booklet the member received in 1994 stated there was a 12-month time limit, she could not reasonably be expected to remember time limits she was told about six years before the transfer.
The PO directed that the member should be offered a transfer credit on the favourable transfer club basis, calculated as available in 2000. The Department of Health must pay the additional costs of this transfer credit over and above a transfer on a cash equivalent basis if required by the scheme.
Determination and consideration of Scally and Bennett
The PO dismissed Mr N’s complaint. The Administrator had a duty to administer the scheme in accordance with the 2005 Regulations and had done so in paying Mr N the correct death benefit under those regulations. It had also complied with the statutory requirements for supplying information set out in the relevant regulations, as had the employer.
The opt-out form was clear that if a member opted out of the Scheme, a death in service grant would not be paid on death before retirement. Mrs N should have queried this with the Administrator or her employer if she was unclear about it.
The PO did not accept Mr N’s claim that the point in the opt-out form under the heading “Why should I be a member of the Scheme?” indicated that a death in service grant would still be payable to deferred members who remained employed. While four of the six points listed under the heading could apply to both deferred and active members, two would not apply to deferred members: the point relied on by Mr N and another concerning the facility to pay extra contributions for additional benefits.
The PO noted that in Scally, the House of Lords held that if certain requirements were met, the employer had a contractual duty to take reasonable steps to inform employees of a contractual term in order for them to take advantage of it. Even if the option to opt out of the Scheme were assumed to be a contractual right, the PO held that Mrs N's circumstances did not meet another of the requirements set out in Scally: that she could not have reasonably been expected to be aware of the term unless it was drawn to her attention by the council. Not only did the opt-out form point out the advantages of being an active member, the declaration signed by Mrs N meant she should have been aware of the relevant information about death benefits for active and deferred members that was readily available via the Scheme website and booklet.
In this context, the PO distinguished his determination in Bennett. In that case, the complainant could not reasonably have been expected to remember time limits given in the scheme booklet six years before the relevant transfer, but not made known at the time. In Mrs N's case, there was no such inconsistency. It was clear from the information given at the time Mrs N applied to opt out of the Scheme that the death in service grant would not be payable if she died before retirement.
The PO therefore concluded that although Mrs N may have believed her husband would receive a death in service grant, this was not due to any failing by the council or the Administrator as the relevant information was available to her. He also noted there was no evidence to support Mr N's contention that the council had a usual policy of advising members who elected to opt out of the implications of doing so.
The circumstances in which employers are obliged to give information to employees about pension rights have been debated over many years and considered in cases such as Scally. In broad terms, it seems from these cases that employers are not obliged to advise members about their pension rights, or highlight potentially detrimental decisions, or inform members of how best to exercise their pension rights. Employers must avoid giving anything that might constitute “financial advice” as they will not normally be authorised to do so under the relevant FCA rules. The determination in Bennett marked a rare example where it was held that the relatively narrow criteria for establishing an implied term set out in Scally had been fulfilled.
However, although the possible Scally reasoning regarding the application of an employer’s implied contractual duty has been raised from time to time, the PO is usually reluctant to rule that the Scally duty has been breached. Nevertheless, where the Scally argument is brought up, the PO may determine that there has been maladministration where employers have failed to follow good practice. On this basis, employers should always seek to provide members with full details of a scheme's benefit structure, ensure that these details are clear, and ultimately suggest that members seek independent advice before making financial decisions.