Recovery of overpaid pensions
It is not uncommon for pension scheme administrators to make errors in pension payments which lead to members receiving greater payments than they are entitled to under the rules. Once the error is discovered, trustees normally want to pay the correct pension going forward, and will also need to consider whether or not to seek to recover past overpayments from the relevant pensioners.
The starting position
The starting position is that members should only receive the benefits to which they are properly entitled under the scheme’s rules.
If a pension has been overpaid by mistake then the trustees can, in many cases, recover that overpaid pension from the member. The fact that the scheme’s administrators may have been careless or even negligent in making the overpayment will not bar the trustees from seeking to recover that overpayment (though it might give the member grounds for a complaint about maladministration).
Methods of recovery
Once an overpayment has been discovered, there are a number of ways in which the trustees can seek recovery.
Ask the member
It is often overlooked, but if the trustees intend to recover overpaid pension from a member, they should, as a first step, write to the member to explain the position and ask for repayment of the overpaid pension. The member may agree to repay the money (usually in instalments), or may agree to future reductions to their pension (as discussed below).
Trustees must be mindful of the fact that the error is not normally the member’s fault. The tone of their approach to a member should reflect this – the Pensions Ombudsman (TPO) has been quite critical of overly aggressive correspondence in the past.
If the member refuses to repay the overpaid pension, then one option open to trustees is to bring a court claim in restitution to recover monies paid by mistake. The claim should be relatively straightforward (subject to the defences discussed below).
There are, however, significant downsides to such proceedings. They can be expensive, especially when compared against often low amounts of overpayment, and/or where the trustees have to pursue multiple claims against different beneficiaries who were all overpaid. Additionally, trustees may be reluctant to sue pensioners for reputational reasons.
An alternative to litigation is the self-help remedy of recoupment, under which trustees make deductions from a member’s future pension payments to compensate the trust for the overpayment. This is the most common and practical way to recover overpaid pensions. Trustees will only be able to use recoupment if it would be fair to allow the adjustments to be made. Specifically, the trustees must ensure that the rate of recoupment is not unduly harsh or inequitable. TPO has specified that the recoupment period should be at least as long as the period during which the overpayments occurred.
Court approval is not required for the trustees to exercise recoupment if there is no dispute about the amount. However, where there is a dispute, the trustees should obtain an order from a competent court. This is because section 91 of the Pensions Act 1995 broadly provides that if a member disputes the amount of the recoupment, then trustees cannot recoup the overpaid pension unless they have an order from a ‘competent’ court. A 2018 High Court decision suggests that a determination by TPO does not meet this requirement, but TPO disagrees with this view and may direct that trustees are entitled to exercise recoupment against a member.
In some circumstances, a member may be able to defend attempts to recover an overpayment. The most common defences are set out below.
Change of position
The most common member defence, although they may not expressly use this phrase, is ‘change of position’. In this case, a member has a defence to repayment under common law if they have changed their position such that it would be inequitable (unfair) to require the member to repay the money paid in error.1
To succeed, the member must show that they entered into an irreversible financial commitment in good faith based on the belief that their pension payment was accurate. The member must also show a causal link between the overpayment and the financial commitment, and the money must not have been spent on something that the member was already obliged to pay (such as a debt). If the member is only able to show that part of the overpayment was spent in an irreversible manner, then they will not be entitled to retain the rest.
If the member suspected that they were receiving an overpayment, but chose not to look into it, the member cannot take advantage of the change of position defence.
A member can raise the defence of estoppel if the member can show that they received an unambiguous representation on which they reasonably relied, and that they suffered a detriment as a result. Estoppel is rarely argued because it is difficult to establish. However, if the member can establish the relevant factors, they will be entitled to keep the entire overpayment.
Under the Limitation Act, trustees must bring any claim against a member to recover overpaid pension within six years of the date on which the mistake was discovered (or should have been discovered with reasonable diligence) – this needs to be carefully assessed. Members have been able to use the limitation period as a successful defence against a restitution claim where trustees could with more care have discovered the mistake earlier.
1 Lipkin Gorman v Karpnale (1991).