NHS fine shows importance of monitoring retirement dates

A £4,000 fine for the NHS pension scheme has highlighted a hidden danger for all defined benefit (DB) schemes of members retiring later and breaching contribution limits.

NHS Pensions was fined by the Pensions Ombudsman after one member mistakenly carried on working for two years, having been led to believe accrual in her pension could continue.

With more members forced to work longer, this is a growing administrative risk for all DB schemes.

Schemes must ensure staff as well as trustees are fully aware of the pension rules, especially when contribution limits are met. 

It is also advisable for administration to be managed collectively, including trustees, schemes administrators and the parent company. 

Schemes failing to inform their members correctly of when their contribution limits are reached may be forced to recompense members within a limited timeframe. They may also face fines.  

The NHS case

The NHS scheme is only as good as the people who administer it

The ombudsman issued the penalty after a member – referred to as Miss Foster – was told she could carry on contributing to her pension, despite having reached the maximum 45 years’ pensionable service. The scheme originally offered £250 compensation.

She had contacted the scheme to ask if she could carry on contributing despite having already accrued the maximum service, and the scheme informed her that, if she did, she would have the benefit of getting a higher final pay figure at retirement.

Two years later, the scheme wrote to Foster informing her that contributions should have stopped on her 65th birthday and refunded her £3,457.53, with interest of £112.51.

Foster expected to receive a pension of £17,033 and a tax-free lump sum of £51,099. Instead, she received a pension of £15,587 and a cash lump sum £46,760 – a difference of £1,446 a year pension and £4,339 lump sum.

Foster said she would have worked only part-time in light of this information and requested the extra pension paid to her should be from her last three, instead of her first three, years of employment as she could not "buy back lost leisure time”.

NHS Pensions constituted maladministration, which doubtless caused her considerable injustice

Deputy ombudsman Jane Irving said: “Overall, the provision of incorrect information to Foster by NHS Pensions constituted maladministration, which doubtless caused her considerable injustice.

"She is entitled to appropriate compensation for that and I consider the amount offered by NHS Pensions to be inadequate.”

Irving ruled “distress and inconvenience” had been caused by the maladministration and instructed NHS Pensions to recompense Foster £4,000 in 28 days.

James Davenport, communications manager at the NHS Business Services Authority, said: “NHS Pensions did not object with the final determination of the pensions ombudsman in this case and has fully complied with the directions given.”

How to avoid maladministration fines

Nick Atkin, director at Atkin & Co, said there was a higher risk for schemes of contribution limits being breached as members increasingly worked past their normal retirement date.

"The key is to be clear about what the limits are, to regularly report on which members are in danger of reaching any limit and ensuring that all parties are kept up to date, including the company, scheme administrators and members," he said.

"It is also vital members are kept up to date and any member communication is clear, concise and well explained."

Stuart Pickford, partner at Mayer Brown, said it was imperative for individuals tasked with answering members’ queries to be given clear guidance on how to answer the sort of questions expected.

Responsible individuals should also “be trained to identify those situations where the right thing to do is not to give an immediate answer. Knowing when the correct reaction is 'I can’t answer that but I know someone who can' can save costly and time consuming disputes,” he said.

Jennie Kreser, partner at Silverman Sherliker, said the NHS scheme was "only as good as the people who administered it” and those responsible for the maladministration clearly did not understand the scheme they were operating.

She stressed it was important to monitor the staff in charge of the scheme – and not just the trustees.

But she countered that it was only human error to make mistakes and that it was difficult to get accurate results 100% of the time.