Ill-health pensions – What you need to know

Indeed, they made up 9.4 per cent of pensions ombudsman complaints during 2014-15. Schemes can hope to avoid these member complaints where they follow some tried and tested principles.

What is the ill-health test?

The starting point to decide whether or not a member qualifies for an ill-health pension is the scheme rules.

However, do remember that the ill-health condition set out in the Finance Act 2004 must be satisfied. This is important. If scheme rules are more generous than the definition of ill-health, there is a risk  the scheme may be making an unauthorised payment.

Some scheme rules require the decision-maker to exercise a discretion – the most fertile ground for pensions ombudsman complaints

Remember also to apply the right rule: different sections frequently have different tests.

In addition, often the ill-health rule does not expressly state that the member’s condition should be permanent. However, the High Court, in Harris v Shuttleworth (1993), decided  there was an implied requirement that the condition should be permanent until the member had reached at least normal retirement date.

Who decides whether or not a member qualifies for a pension?

It is crucial the correct individual decides whether or not the member qualifies for an ill-health pension.

Some rules provide that it is the employer alone, the trustees alone, the employer or the trustees with the agreement of the other or maybe the scheme’s medical adviser.

Ill-health benefits tend to be expensive to provide. They may include an element of prospective service, be unreduced and may be paid before age 55. Where the employer is a decision-maker, it must approach the decision as if it was a quasi-trustee – it cannot just consider its own interests.

How should a decision be taken?

The exact decision-making process depends on the wording of the scheme’s rules. Some rules require a decision as to whether or not the member meets the definition of incapacity. Other rules require the decision-maker to exercise a discretion – the most fertile ground for pensions ombudsman complaints.

The High Court, in Trustees of the Saffil Pension Scheme v Curzon(2005), neatly summarised the difference between the two decision-making processes: 

• If the decision-maker has all the relevant information needed to make an informed decision but comes to a perverse decision, the decision may be overturned.

• If the scheme rules are ambiguous as to whether the decision-maker has a discretion, the decision-maker must confine him or herself to the facts. If there is no discretion, the decision-maker must gather evidence and decide whether or not the criteria for incapacity are met. Where the criteria are satisfied, the pension must be paid whatever the decision-maker’s views concerning the claim’s merits.

Whatever the decision-making process, it is crucial that all relevant evidence has been gathered – the use of covert surveillance may even be appropriate. While it is not necessary to provide full reasons for a decision, it is good practice to provide reasons that demonstrate an understanding of the facts.

Can an ill-health pension be back-dated?

There is no general principle that payment of an ill-health pension must be back-dated.

Decision-makers must be cautious when revisiting historic decisions with the benefit of new information. Any decision to back-date payment involves careful consideration of scheme rules and the circumstances of the case.

Can an ill-health pension be reviewed?

The short answer is it depends on the scheme rules. Some rules allow an ill-health pension to be reviewed with a view to stopping payment if the member no longer satisfies the ill-health criteria, and some do not.

Some rules provide that an ill-health pension may recommence if the member’s health subsequently deteriorates, but some rules only allow the pension to be restarted when the member reaches normal retirement date.

Special rules apply where a scheme is in a Pension Protection Fund assessment period.

Ruth Bamforth is an associate at law firm Walker Morris