High Court Ruling Fails to Settle Overpayment Recovery Issue

Decision offers some clarity, but adds confusion for pension trustees collecting overpayments.

A recent ruling by the UK’s High Court that determined that defined benefit pension plans are not subject to the six-year time limit to recover pension overpayments has the potential to cause confusion for pension trustees dealing with overpayments, according to legal experts. 

The case, Burgess and others v BIC UK, centered on the BIC UK Pension Scheme, and its employer BIC UK Limited. According to High Court documents, the pension had a significant surplus in the early 1990s, which it was legally obligated to reduce because of regulations introduced in 1987 that required a company to limit the funding of its pensions to 105% of its liabilities.

The regulations were intended to prevent companies from manipulating their tax liability by varying contributions to their pension plans.  The claimants of the case, who are the current trustees of the pension, said that the BIC UK trustees in 1991 decided to apply limited price indexation increases to pensions in payment to the extent that they exceeded the Guaranteed Minimum Pension (GMP). The GMP is a minimum level of pension that had to be provided by pensions contracted out of the State Earnings-Related Pension Scheme (SERPS) or the Additional State Pension. The increases were applied annually from April 1992 going forward.

However, the validity of the increases relating to service prior to April 1997 has been challenged by BIC UK since 2011, and payment of pre-1997 increases had been suspended since March 2013.

The task set before the High Court was to determine whether the pre-1997 increases were properly paid; and if they were properly paid, whether they can now be stopped. And if the increases were not properly paid, the Court also had to determine if the trustees can now recover from the pensioners the payments made since 1992. The trustees argued that the pre-1997 increases were properly paid and therefore could not be stopped or recovered.

In relation to overpayments, the BIC decision considered whether—and, if so, to what extent—a statutory limitation period applied where trustees sought to recoup past overpayments through a reduction to members’ benefits in the future.  Earlier High Court decisions, in particular Webber v Department of Education, ruled that trustees were not able to recover more than the last six years of past overpayments.  And depending on the particular circumstances, they might even be faced with recovering significantly less than those in the last six years. 

The judge in BIC case disagreed with this and concluded that no statutory limitation period applied to such a situation. However, the ruling has not overruled the earlier decisions, according to Peter Murphy, a partner at Sackers, a UK-based specialist law firm for pension trustees.  Although the judge took a different view, his ruling does not technically overrule them, he said.

“This puts trustees and other dealing with the recoupment of overpayments in a pretty unsatisfactory situation where there is now no definitive statement of the legal position,” Murphy told CIO. 

The judge in the BIC case also ruled that the Pensions Ombudsman is not a sufficiently competent authority to deliver an order under the Pensions Act 1995 in favor of allowing trustees to undertake equitable recoupment. The High Court ruled that trustees could instead obtain the necessary resolution from the county court.

Murphy said that all eyes will now be on the Pensions Ombudsman, who normally rules on overpayment issues in a pensions context.

“But how he might deal with future cases in the light of this decision is anyone’s guess,” said Murphy.  “And whatever he does, there is now real scope for the unsatisfied party to appeal again to the High Court (and potentially to the Court of Appeal).”

Murphy says that only a decision of the Court of Appeal would now be legally definitive.  However, he adds that an additional High Court decision, ideally on appeal from the Pensions Ombudsman and focusing entirely on this issue, might also be regarded as effectively definitive (even though not legally definitive) from a practical perspective.

“Even if the Pensions Ombudsman determines that the trustees have the right to seek recoupment, the trustees need to get a court order to enforce that determination,” Claire Carroll, a partner at UK-based law firm Eversheds Sutherland, told CIO. “Court action against members is not usually an attractive option for trustees, but will be necessary if the member continues to dispute the right of recovery.”

Carroll said a positive point in the judgment is that the High Court has confirmed that the trustees can, where overpayments have occurred, seek to recover those overpayments through recoupment from future pension payments, and that a statutory time limit does not apply.

“From a practical perspective,” said Carroll, “trustees will usually seek to ensure that the period for recovery is not shorter than the period of overpayment, in order to limit the financial impact for members.”

The overpayment of pension benefits is not uncommon, said Murphy, who adds that while the reasons for this are many and varied, most UK pensions will probably have overpaid some benefits at some stage.

And although the ruling could cause confusion among trustees, it does provide a useful clarification of how the existing legislation applies for pension plans and trustees who are dealing with historical overpayment, according to Jon Walters, a partner at Eversheds Sutherland.

“The judgment brings some additional legal certainty to what is, unfortunately, a commonly encountered area of pension plan administration,” Walters told CIO.  “Recovery of overpayments from members needs to be handled sensitively and having clarity around the rules that apply is useful for pension plans and their trustees.”

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