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Articles 13th Jul 2023

Pensions Law Update: Death Benefit

Pensions Ombudsman decides who gets death benefit

Deciding who should receive a lump sum death benefit (or a share of it) can be difficult particularly if the member had not completed an Expression of Wishes form recently or there are complicated family circumstances. Trustees generally do the best they can, recognising that there is not necessarily a right answer, but they must follow a robust procedure for gathering and considering all the relevant information when they make their decision.

A recent Pensions Ombudsman determination (Ms E (Allen SSAS)) was unusual in that the Pensions Ombudsman went so far as to impose his decision as to whom the benefit should be paid. Typically, the Pensions Ombudsman would refer the matter back to the Trustees to make the decision again if a complaint is upheld.

In this case, the Pensions Ombudsman also decided that the lay trustees and the professional trustee had acted in bad faith and were not protected from liability by the scheme’s exoneration clause (which excluded liability “except to the extent attributable to his act or omission knowingly and deliberately committed in bad faith”).

The fundamental problem with the trustees’ decision in this case was that it was tainted by a conflict of interest. The lay trustees stood to benefit from their decision. The professional trustee had ostensibly remained impartial, but it should have recognised the conflict of interest and done something about it.

The Ombudsman’s decision was that:

  • The lump sum death benefit should be paid to the complainant;
  • The lay trustees and the professional trustee should each compensate her for distress and inconvenience (£1,000 and £2,000 respectively);
  • The trustees should reimburse the complaint for any tax she had to pay as a result of the lump sum being paid more than two years after the date of the member’s death.

 Lack of actuarial certification could invalidate scheme changes

 Contracting-out ended in 2016 but still has the potential to cause trouble.

For benefits accruing on and after 6 April 1997, a contracted-out salary-related scheme (COSR) had to provide benefits which were broadly equivalent to, or better than, a reference scheme specified in the legislation. When the rules of a COSR were changed it was necessary to get written confirmation from the actuary that the scheme would continue to satisfy the statutory standard.

The requirement was changed with effect from 6 April 2013 to make it clear that the actuary’s assessment of the change was forward looking, so it was concerned with the benefits members would earn for pensionable service after the date of the change.

Unfortunately, there remained some doubt as to what the legislation meant prior to that change, i.e. for scheme amendments made between 6 April 1997 and 5 April 2013.

  • Was the actuary’s confirmation concerned only with past service rights?
  • If the actuary’s confirmation wasn’t obtained, was the amendment void (invalid)?
  • Were amendments which improved benefits also affected?

The recent judgment in Virgin Media Limited v NTL Pension Trustees II Limited and others has provided answers to these questions, though not necessarily the ones practitioners had hoped for.

Trustees need to know what benefits they should be paying so doubts about the validity of scheme amendments need to be resolved but there are likely to be questions about how much digging trustees should do.

It is possible however that the case may be appealed, and the judgment could be overturned.

Department for Education guarantee applies to academies outsourcing

The Minister for Schools recently announced an extension to the guarantee given by the Department for Education (“DfE”) to academy trusts in respect of Local Government Pension Scheme (“LGPS”) liabilities which may make it easier for academies who wish to outsource services like catering and cleaning.

Academy trusts are automatically employers in the LGPS and when they outsource services, they must ensure that the pensions of transferring employees who are in the LGPS are protected (academies are subject to the governments New Fair Deal policy).

The contractor will need to be admitted to the LGPS so that the transferred employees can continue their active membership of the scheme. Being an employer in a defined benefit pension scheme of course carries risks. The future cost of providing the promised pensions is uncertain and, at least to some extent, outside of the employer’s control. From the contractor’s point of view, greater certainty may be attractive and “pass-through” arrangements can give that. These arrangements reallocate risk from the contractor to the outsourcer and mean contractors can better understand what the cost of pension provision will be through the life of the contract.

Outsourcing also presents risks for LGPS Funds. The risk for them is that the employer will not be able to pay contributions which are due to the Fund.  To mitigate the risk of default, admitted bodies can be required to have a bond (an insurance policy which pays out a certain amount in the event of employer insolvency) or guarantee. In 2013, the DfE put in place a guarantee so that administering authorities of LGPS Funds would see academy trusts as low risk employers. In the event of an academy trust closing, the Fund would not be left with unfunded liabilities. If the academy trust could not pay, the DfE guarantee would ensure the Fund was not left out of pocket.

Pass-through arrangements could increase exposure under the guarantee and academy trusts had to obtain approval from the Education and Skills Funding Agency before agreeing them. The government says the new policy means that approval will no longer be needed in the following circumstances:

  • Employees eligible for LGPS who are working for the academy trust are transferred to a contractor or on future re-tenders as part of an outsourcing contract.
  • Employees eligible for LGPS who were working for the local authority in a maintained school, then transferred to a contractor under TUPE, prior to the school becoming an academy, and where the outsourcing contract has passed to the academy trust following conversion to an academy.
  • Employees eligible for LGPS who are working for the local authority, which is providing services to the academy trust under a contract, and the trust decides to outsource this contract to a third-party provider. Therefore, the employees transfer from the local authority to the new contractor.

If you have any queries you would like to discuss please contact Kim Jones

The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

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