Provider's failed attempt to reclaim death benefit sets rectification warning

Lawyers have also urged schemes to keep a watchful eye on record-keeping after the original beneficiary nomination form was misfiled.

In a complaint against Friends Life, applicant Mr J Hawkins and his brothers said it had wrongfully tried to recover payments made after the death of their father Melvyn Hawkins.

In 2007, Mr Hawkins senior nominated his three sons and partner to each receive, in the event of his death, 25 per cent of the lump-sum benefit from his savings in the Friends Life-administered Center Parcs Group Personal Pension Plan.

After his death in August 2012, the trustees of Friends Life decided to split the lump-sum death benefit of nearly £52,000 equally between the applicant and his brothers.

However, it was later found that the scheme had not considered the nomination form, which had been misfiled. In order to rectify this it asked the brothers to return more than £4,000 each to provide the late Mr Hawkins' partner with what it considered to be her share of the benefits.

The ombudsman decided last month that under the Hastings-Bass rule – named after the Hastings-Bass court case of 1975 – it was not within the power of the trustees to recover the monies unless the original decision was properly set aside through the courts.

The determination stated: "If an exercise by trustees of a discretionary power is within the terms of the power, but the trustees have in some way breached their duties in respect of that exercise... then the trustees’ act is not void but it will be voidable mainly at the instance of a beneficiary who is adversely affected. 

“In these circumstances a court can set the decision aside. The trustees cannot simply decide the decision was not made correctly and make it again.”

The provider was directed to not seek recovery of monies “until such time as the original decision is set aside” and to pay each applicant £300 as compensation for the distress and inconvenience caused.

A spokesperson for Friends Life said when the relevant information about a fourth beneficiary subsequently came to light, a payment was made to them immediately, but that it "made an error" in requesting the return of some of the money. 

"We should not have done this and we apologise for this error," the spokesperson added. "We have reviewed our processes to ensure that this cannot be repeated."

A spokesperson for Center Parcs said the ombudsman had not been in touch with it regarding the case and that the death-in-service benefit had been paid in full to the beneficiaries, adding: "This decision was taken with the requisite diligence and was overseen by the board of trustees."

Anne-Marie Winton, partner at law firm Nabarro, said the determination demonstrates unravelling an error is difficult and sometimes impossible.

While expressions-of-wish forms are not binding, their contents are a relevant factor that trustees should take into account when allocating death benefits.

"An attempt by Friends Life to claw back part of the death benefits paid out to the deceased’s sons to reallocate them to a fourth recipient was doomed to failure without a court order being in place setting aside the original decision-making,” said Winton.

Tim Smith, senior associate at law firm Eversheds, said: “The ombudsman has made clear that once trustees have made a decision to exercise a discretion... they cannot simply revoke that decision if they later discover that they failed to take account of an important piece of information."

He added the case showed the importance of good record-keeping, due to the cost of "trying to unravel the resulting mess".

Arshad Khan, associate director at law firm Sackers, said: “The ombudsman’s decision appears justified as a matter of strict legal principle in light of the Supreme Court’s decision in Pitt v Holt/Futter v Futter.

"In practice, however, the decision is likely to be seen as inconvenient and will create some uncertainty and difficulty for trustees when dealing with death benefit cases."

Khan said the onus falls on the trustees to be sure they have all the relevant information when making a decision.