How to protect your scheme against payment errors

Law firms have reported that issues around overpayments or miscalculations have become more common as increased numbers of people reach pension age, and have called upon schemes to closely monitor administration.

It follows determinations by the pensions ombudsman last year, which caused uncertainty about whether picking up errors in documentation was the responsibility of the scheme or member (links open Word documents).

Law firm Squire Sanders has seen an increased number of requests for advice from trustee clients on this issue.

Kate Lloyd, senior associate at the firm, warned schemes that they are not always protected by wording in documentation such as ‘scheme rules will prevail’ if there is an inconsistency in estimates.

“It seems there have been some ombudman’s cases recently where members have successfully argued a change-of-position defence and have been entitled, or the ombudsman has awarded them either the originally quoted pension or other amounts,” she said.

Such cases should be a warning to trustees to double-check the information being provided to members by administrators.

It was also worth examining agreements in place with third parties, so that where errors do occur the trustees can recover losses from them, she added.

A pensions ombudsman spokesperson said it does not have a set stance and treats each case on its individual merits.

Repairing mistakes

While most errors occur as a result of administration, there are other causes.

Wyn Derbyshire, head of pensions at SJ Berwin, said: “Almost all of it is down to honest mistakes. It’s not the trustees themselves doing the calculations, of course; sometimes mistakes just get made."

Not only have you got to make good that underpayment, but you’re probably adding interest on top

There are times when beneficiaries do not tell the trustees of the relevant personal circumstances even though they have been asked, he added.

Where trustees have made an overpayment, their starting point should be to seek recovery of the money from the recipient, according to Jeremy Goodwin, pensions partner at Eversheds.

He added: "However, whether the trustees are successful will depend upon the circumstances, for example, whether the recipient ought to have been aware that it was an error or whether a member has, in reliance on a large overpayment, splashed out on something like a cruise or home improvements that they wouldn’t otherwise have bought."

Paying too little

But underpaying beneficiaries is another problematic area. Fraser Sparks, partner at Stephenson Harwood, said this error can be costly for schemes and employers.

"Not only have you got to make good that underpayment, but you’re probably going to be adding interest on top of that as well,” he said.

The Pensions Regulator has made scheme data one of its main priorities. A spokesperson said schemes could significantly reduce the risk of over and underpayments by taking into account its guidance on record-keeping and internal controls.

“We are currently undertaking a detailed review to establish whether schemes have met targets for keeping accurate records and the standards set out in our guidance," said the spokesperson.

"If we find breaches of pensions legislation, we can take action including issuing improvement notices and financial penalties.”