Pensions Ombudsman highlights importance of documenting contractual pension benefits in scheme rules

In the decision (69 pages / 4.5MB), the PO criticised the employer for failing to adequately document and maintain the employee’s contractually entitled pension benefits for almost 18 years despite earlier promises that it would “mirror” the benefits he had received under previous schemes.

The dispute involved Mr H, who joined the Olsy Pension Scheme (the Olsy Scheme) on 1 September 1981, when he was employed by British Olivetti Limited. The rules governing the Olsy Scheme provided for pensions to be increased at the direction of the employer. The scheme booklet stated that pensions would be increased each year in line with RPI capped at 5%.

On 1 May 1989, Mr H became entitled to “special terms” that were provided to executive members of the Olsy Scheme at the time. These overrode any other inconsistent rules of the Olsy Scheme, but did not mention increases to pensions in payment.

On 1 January 1996, Mr H’s employment was transferred to Olivetti Lexikon UK Limited as part of an internal company reorganisation.

Mr H was told by letter on 24 June 1996 that a decision had been made to transfer his benefits from the Olsy Scheme to the Olivetti UK Limited Pension and Life Assurance Scheme (the Olivetti Scheme), although the transfer only took place on 1 January 1998. Announcements issued in 1997 told him that his pension earned up to 31 December 1997 would be provided on the same terms as under the Olsy Scheme. Mr H queried this and received specific assurances that his Olsy Scheme pension would be “mirrored” in the Olivetti Scheme. Mr H applied to join the Olivetti Scheme on this basis and elected to transfer his Olsy Scheme benefits to it.

In June 1998 Mr H left the Olivetti group. The PO noted that his leaving service statement corroborated the commitments laid out in these communications made to Mr H in 1997, meaning the employer would honour all benefit increases and other “special terms” that he was entitled to at the time of the transfer.

Mr H opted to take his benefits in October 2014, but the retirement quotation did not reflect the promised increases that had been outlined in earlier communications. Instead, it referred to the pension increases applicable to members of the Olivetti Scheme, who had no previous service transferred from the Olsy Scheme.

At this point, for members with no Olsy Scheme service, pensions under the Olivetti Scheme were being increased by 3% per annum in respect of benefits earned before 6 April 1997, and in line with inflation capped at 5% per annum in respect of benefits earned thereafter. These increases had been communicated to members of the Olivetti Scheme by announcement in 1988 and 1997. However, the rules of the Olivetti Scheme had never been amended to provide for these increases.

In 2015, the Olivetti Scheme’s trustee sought legal advice on the scheme rules and, in particular, the level of pension increases to which members were entitled.

Following this review, in a letter dated 22 May 2017, Mr H was told that his pre-6 April 1997 pension was not entitled to pension increases and would be adjusted to the correct level going forwards. Due to the correction of other benefits errors at the same time, his pension was not reduced.

Mr H filed a complaint against the employer and the trustee, arguing that future annual increases to his pre-6 April 1997 pension were less than what was communicated to him in 1997.

Historically, the PO has tended to uphold the primacy of scheme rules over communications with members. However, on this occasion, the PO found that communications between the employer and Mr H were sufficient to constitute a binding contract that overrode the scheme rules. This is because the 1997 announcements clearly promised that the Olivetti Scheme would provide former members of the Olsy Scheme with their accrued benefits on “mirror image” terms and Mr H accepted membership of the Olivetti Scheme on that basis and transferred his Olsy benefits to it.  There was an intention on both sides to be bound by the promised terms, and the employer was in breach of that agreement by failing to amend the Olivetti Scheme to confirm that the promised benefits would be provided through it.

The PO therefore concluded that Mr H’s accrued Olsy Scheme benefits should increase under the Olivetti Scheme at such rate as directed by the employer from time to time (subject to the statutory floor for any post-6 April 1997 element). He also concluded that at the time Mr H transferred from the Olsy Scheme to the Olivetti Scheme, the employer had made a direction under the pension increase rule that pensions would increase in line with RPI capped at 5% per annum.  This direction was still in force, unless and until the employer issued a new direction.

The PO criticised the employer for maladministration and breach of law for failing to record and administer the terms of the transfer agreement and ensure that any amendments were properly documented.

The PO determined that there was no maladministration on behalf of the trustee as it had taken and followed legal advice. However, the trustee was held to be in breach of trust for failing to provide the “mirror image” benefits from 22 May 2017 that were promised under the Olivetti Scheme’s transfer-in rule in return for Mr H’s transfer payment.

The PO directed the employer and trustee to provide Mr H the increases due in respect of the period from 22 May 2017. The PO also awarded Mr H £1,000 for distress and inconvenience sustained as a result of the maladministration.

The case stands out first and foremost because the decision identified a continuing contractual obligation to “mirror benefits” almost two decades after they were first promised.

The decision also serves as a reminder that special terms should be recorded, ideally in the scheme rules, to ensure they are identified and correctly administered and not overlooked.

Co-written with assistance from Rebecca Howard and Richard Meers of Pinsent Masons.