Pensions: recovery of overpayments

The High Court’s recent judgment in CMG Pension Trustees Limited v CGI IT UK Limited [2022] EWHC 2130 (Ch) (CMG) has practical impact for pension schemes seeking to recoup overpayments made to members. This article explores some of the key implications below, while noting it might not be the final word in this challenging area.

Routes to recovery

Pension scheme trustees are firstly legally entitled to stop the overpayment continuing any further once identified and can re-set the pension to the correct rate for the future.

However, for overpayments paid until such time, trustees have two options to recover these amounts:

·        A claim in restitution: if a member does not agree to repay, trustees can issue a court claim. However, this is not always economic or simple in practice. The Limitation Act 1980 will, in summary, apply to preclude trustees from recovering overpayments paid more than six years before the claim which, in the lifetime of a pension in payment, is often not enough to recover the entire sum overpaid. Further, once a judgment is obtained, it may still need to be enforced against the member.

·        Recoupment: this is an equitable principle allowing trustees to make a deduction from a pension in payment in recognition of a past overpayment, so the full and correct overall benefit is paid across the member’s lifetime. It is often referred to as an accounting method and a ‘self-help remedy’ as it can, in principle, be exercised without the need for court action. Recoupment has a number of advantages, as it avoids litigation against members and no limitation period applies.

Given this, in practice, recoupment is typically favoured by trustees where available.

Section 91(6)

Section 91(6) of the Pensions Act 1995 states where a ‘charge, lien or set-off’ is exercisable against a person’s pension entitlement and there is a dispute as to its amount, it must not be exercised unless “the obligation in question has become enforceable under an order of a competent court.”

Thus, where a member disputes the amount of recoupment, the trustees arguably cannot recoup without obtaining an order of a ‘competent court’ first.

It was previously assumed the Pensions Ombudsman (TPO) was a ‘competent court’ for these purposes. However, this was thrown into doubt by the High Court in Burgess v Bic UK Ltd [2018] EWHC 785 (Ch), where Arnold J held TPO was not a ‘competent court’ and a court order was necessary under Section 91(6). This was disputed by TPO, who in April 2019 issued a factsheet explaining why he considered he was a ‘competent court’ including that Arnold J’s comments were merely obiter.

In CMG, Leech J agreed with Arnold J, concluding his comments were not obiter. He also held a court order would be required if a member disputes the rate of recoupment, not just the total amount.

Obtaining an order

Trustees will need to comply with the Practice Direction on Pre-Action Conduct by sending a further ‘letter before action’ to the member, allowing them a reasonable period (at least 14 days) to respond. They can then issue proceedings. If the overpayment totals less than £100,000 then proceedings must generally be issued in the County Court; otherwise, trustees can issue in the High Court.

Trustees will also have to choose:

·        Whether to issue the proceedings under Part 7 or Part 8 of the Civil Procedure Rules (CPR). The Part 7 procedure is a ‘typical’ court action in England and Wales, involving the exchange of statements of case and evidence and then a trial. Part 8 provides an alternative procedure for claims which are unlikely to involve a substantial dispute of fact.

·        Whether they can issue claims against multiple members in a single set of proceedings or join multiple proceedings to be dealt with together where a large number of overpayments are identified simultaneously – for example, following a scheme-wide correction exercise or ‘data cleanse’. Dealing with the proceedings collectively can offer time and costs savings but may not be suitable in all circumstances.

·        If issued under Part 7, the most suitable ‘track’ for the claim. Claims worth less than £10,000 are typically allocated to the ‘small claims track’, which provides a simplified and typically cheaper procedure but with very limited scope for costs recovery. The fast and multi-tracks involve more complex and therefore costly procedures, but there is wider scope to recover litigation costs. Trustees will also need to consider the protections available to them, under the scheme rules and/or CPR, in the event of an adverse costs order.

The upshot is recoupment may now become a less favourable remedy if a dispute arises. The costs involved in court action could be significant (the court fee alone to issue a claim is typically 5 per cent of its value), particularly if the claim is defended and may be disproportionate where smaller sums are at stake. Trustees may also be concerned by the potential for negative publicity around ‘suing’ their members, especially where hardship is claimed. A TPO complaint, by comparison, is generally inexpensive and, as it can only be initiated by a member, is not seen as ‘aggressive’ action by the trustees.

This in turn has ramifications for employers, even though they are not party to the proceedings, as they may end up funding unrecovered overpayments or being implicated in any adverse publicity.

Mitigating risk

Trustees can take practical steps to help to protect schemes from these issues.

They should encourage robust scheme administration to minimise the likelihood of benefit errors arising. Trustees should work with their administrators to ensure they hold accurate member data and have procedures in place to identify and resolve overpayments swiftly – for example, regularly undertaking audits of benefit calculations and checking official registers for deaths of pensioners. When overpayments are identified, trustees should act promptly to correct the position.

The risk of disputes can be reduced by communicating effectively with affected members. Trustees should apologise and explain clearly and with sensitivity how overpayments have arisen. They should propose fair and manageable rates of recoupment suitable to the member’s financial position and consider any reasonable counter-proposals from the member. They should also consider offering ex-gratia ‘distress and inconvenience’ payments.

Where overpayments arise due to administration errors, claims against third party administrators could offer an alternative route to recovery. Trustees should revisit their administration agreements to consider whether these are sufficiently robust. Do the agreed service levels ensure overpayments will be identified and reported promptly? Do the terms allow them to pursue the administrator to recover an overpayment? Trustees could seek arrangements whereby overpayments below a ‘de minimis’ threshold are reimbursed by the administrator if caused by their error.

Looking ahead

However, the law in this area is by no means settled. It is not universally accepted Section 91(6) applies to recoupment. In CMG this was agreed between the parties so not considered by the court, but there is an alternative argument recoupment is not a ‘charge, lien or set-off’ as it is simply a right to adjust payments to reflect the member’s true benefit entitlement over the total period the pension is in payment. The court may well be asked to revisit this point in the future.

We also understand TPO is considering its position following the decision and may appeal or seek changes to legislation.

CMG may therefore not be the end of the discussion and schemes should remain alert to future developments in this area.

Amy Difford is an associate at Sackers sackers.com