The perils and pitfalls of member overpayments

It is the news that anyone involved in the administration of a pension scheme dreads; a member’s benefits have not been calculated correctly and, as a result, they have been overpaid their pension. For trustees this can be a very difficult matter to deal with, particularly if the overpayment is significant or has gone unnoticed for some time and there is no evidence that the member knew the benefits they were receiving were incorrect.

As trustees, we have an obligation to pay the benefits required by the scheme rules and no more. This normally means putting the pension right going forward and recovering the overpayments that have been made. This may seem straightforward in theory, but can be fraught with difficulties in practice. We may be dealing with a vulnerable member who is ill or incapable of managing their affairs, a member who is very distressed and upset by the news of the overpayment and where we have concerns for their mental wellbeing (neither trustees nor employer is likely to want adverse press coverage when dealing with such matters). Also, it is not unusual to have a member who refuses to co-operate or engage with the administrators.  

What action should trustees take in the case of an overpayment?

The easier step is putting the pension right going forward. As trustees, we have this within our control and it should be actioned once we have communicated sensitively with the member and given them notice of the date from which the reduced pension will start being paid. If the next pension instalment is due within a matter of days it may be appropriate to pay the incorrect higher amount and alter the next instalment after that, which gives the member enough time to rearrange their financial affairs.

The next step is to attempt to recover the overpayment. Whatever the rights and wrongs of the situation, the member should not have received the pension benefits paid to them and trustees should request the overpayment to be repaid. Consideration should be given as to whether the member should be asked to repay the amount due (in a one-off lump sum or in instalments) or (with the member’s consent) by reducing their future pension instalments. There are issues with both approaches, including whether the recovery of the overpayments has become time-barred, and so it is important to obtain legal advice throughout the process to ensure any actions are appropriate and lawful.

Again, it is important for trustees to communicate with the member sensitively and provide the opportunity for them to put forward arguments and supporting evidence as to why they cannot, or should not, repay the monies due. Members can raise a number of defences which may mean that trustees cannot recover the overpayment, including:

• “change of position”; i.e. the member has changed their financial position in reliance on the extra money they have been receiving to the extent that it would not be fair for them to repay the amount due (only available where the member has acted honestly and did not know the overpayments were errors),
• financial hardship, or
• that the member relied on a statement that they believed was correct as to the benefits they should be entitled to (albeit the statement was in fact incorrect).

Such arguments should not be taken at face-value and supporting evidence should be obtained; e.g., in the case of financial hardship, evidence of the member’s financial position.

Recovery options

If a third party such as the administrator is at fault for the overpayment being made, the trustees will need to consider whether some or all of the overpayments, and the cost of putting the position right, can be recovered from that other party. If trustees are looking to pursue another party, they will be expected to show that they have tried to mitigate the loss by attempting to recover the overpayment from the member.

Throughout the process of attempting to recover overpayments, trustees should bear in mind the cost-benefit of the process. Where a member is in financial hardship or simply won’t engage, costs can quickly rack up. There is a danger that more money and resource is spent trying to recover the overpayment than the cost of the overpayment itself.  A point needs to come where trustees are prepared to cut their losses if progress is not being made with the member, after reasonable efforts have been attempted, and instead, if possible, focus on pursuing any parties at fault, or conclude that the overpayment should be ‘written-off’.

Legal advice

Dealing with such cases is rarely easy. Trustees should always take legal advice to ensure that:

• the member is being dealt with appropriately and as the Pensions Ombudsman would expect, and
• the trustees’ position is protected as far as possible in terms of pursuing claims against any parties at fault.

In addition, trustees should document the decisions they have made when dealing with member overpayments, and the reasons for them, in case their actions are challenged at a later date.