As pensions lawyers, we see certain issues cropping up time and time again in death benefit cases. Here, we take a look at some of the more common pitfalls faced by trustees and pensions managers.
Scheme’s policy incorrectly reflects the rules
Scheme booklets and policy documents can be very helpful summaries of the rules, but may not always be completely accurate. It is important to look at the actual trust deed or rules and check the wording carefully: there may be nuances or qualifications which are not reflected in the booklet or policy document. Depending on the history of the scheme’s governing documents, the calculation of the lump sum may be governed by a previous set of rules, even though the process for paying and the people eligible to receive a lump sum are set out in the current rules. The starting point should therefore always be to work out which rules apply to the member, before checking them thoroughly to find out which kinds of individuals can qualify as beneficiaries, and on what grounds. Failure to accurately follow the scheme’s rules will expose the trustees to claims from unhappy potential beneficiaries.
Many members complete an expression of wishes statement, naming an individual as their preferred beneficiary. However, in most schemes the trustees are not bound by the member’s nomination. As such, failure to carefully consider the expression of wish form will almost certainly be maladministration. Any expression of wishes should be checked against the member’s will (if there is one). The date of the statement is also relevant. If the nomination was made a long time ago, it will be necessary to investigate whether there has since been a change in the member’s circumstances – for example, a separation, a divorce or remarriage, the birth of a child, a death in the family or a change in the financial position of the nominated beneficiary. Further investigation could reveal that the member had a dependant outside of the immediate family. If that is the case, then it will also be important to consider whether the nomination would leave that dependant in financial difficulties.
Taking time to assess the circumstances at the date of the member’s death enables the decision-maker to judge how much weight to give to a nomination. However, failure by a deceased member to alter the expression of wishes in accordance with a change in family circumstances may not be accidental – the decision-maker should also consider if the member intended the form to remain as it was.
The family circumstances of deceased members can be difficult to unravel, especially when emotions between competing beneficiaries are running high. Nonetheless, the right questions must be asked, and the answers given should be pursued where necessary so that the decision-maker can make a fully informed decision. In some cases, this can prove very challenging – especially when there are conflicting reports or claims from different interested parties – but a failure to ask enough questions to ensure that the facts are fully established may well leave the trustees’ decision open to challenge. If a decision is later disputed, the person or committee who made it will need to be able to show that they established the facts fully.
Difficulties in identifying ‘dependants’
Failure to identify all potential dependants is another reason why a death benefit decision might be challenged. Where the rules provide that certain of the member’s relatives fall within the category of potential beneficiaries, such as their spouse or children, the trustees should be able to easily identify who these people are. However, where rules include other categories of potential beneficiary, such as individuals who are ‘financially dependent’ on the member, this is not so clear cut. Understanding what exactly is meant by financial dependency can be a challenge. It is common for an unmarried partner to claim dependency, but it may not always be appropriate to treat a co-habiting partner as a dependant for the purposes of the scheme, as the following case study shows.
It is common for trustee boards to delegate death benefit decisions to a committee. To do this properly, the delegation must be permitted by the trust deed and rules of the scheme. The delegate’s role and authority should be set out clearly, and the terms of the delegation should cover whether, and in what circumstances, the decision-making power should revert to the whole trustee board. A decision made without the proper authority can be overturned.
Even if decisions are being taken by a committee, all trustees need to be knowledgeable about the process for decision-making and capable of checking that the committee is working properly. Ultimately, the full board retains responsibility for the decisions of the committee, so the committee should report back on the decisions made for monitoring purposes. To avoid a challenge regarding the decision-maker’s authority, it is important that the committee follows this process diligently, making it clear that it has followed correct procedures and kept within its terms of reference.
If a decision is challenged, the decision-making process will need to be able to withstand intense scrutiny. If there is no paper trail that fully records the decision and the decision-making process, then the decision may be open to challenge. A simple note of the final decision itself is not enough. Records should include all of the information gathered, which factors were considered and which of these were disregarded (and why). If the scheme has a policy or guidelines for the process, the record should confirm whether they were followed or departed from by decision-makers (and the reasons for doing so). The reasons for the final decision should be fully recorded, including details of which factors were most influential.
When things go wrong
Trustees must be absolutely certain about their decision before making a payment. It can be very difficult to get money back after it has been paid out, and disputes can be costly and time-consuming to resolve (as well as causing distress to the family of the deceased member).
Recovering payments made in error can be tricky (see our guide to recovering overpaid pensions at www.allenovery.com/overpayments) – but we can help you find an appropriate strategy for your specific circumstances if a mistake of this kind has been made.