Expensive mistakes will be more difficult to rectify after a Jamaican case ruling in the UK. But they can be prevented by monitoring administrator relations and effective communications
The landmark ruling in the Privy Council will impact schemes in this country as judges in UK courts look for guidance where there are gaps in case law.
To prevent costly mistakes
Set up an administration sub-committee;
Encourage administrators to report mistakes each meeting; and
Make sure members know their responsibilities in each payslip to keep data clean.
In the case involving two pension schemes of Jamaican Island Life, an insurance company, trustees were unable to correct a mistake in the £106,000 transfer of funds after communicating the wrong amount.
This is the first time such a case has come before UK law.
It means schemes that do miscalculate or communicate benefits incorrectly are at risk of finding it more difficult to claw the money back after the ruling, at a potentially large cost.
Healthy relationships with administrators, combined with effective member communication and education, are vital to stop mistakes happening in the first place, to minimise the cost to schemes.
Clive Wickenden, client services director at Capita Hartshead, said: “Mistakes do happen. Get agreed procedures in place so people really know what to do if they do occur.”
Transfer confusion
The case involved a J$14.7m (£106,000) transfer between two pension schemes in Jamaican Island Life. Trustees of one scheme were unaware of payments authorised by the trustees of another.
Member Michael Fraser disputed a calculation made by trustees of the Salaried Staff Pension Plan at Island Life during the handing out of the company’s surplus after several redundancies in 2003.
Often in schemes, factors will change. Trustees must ensure a proper record is kept
Chris Stewart, Nabarro
Fraser had not received his full entitlement of J$6m, instead getting J$866,688, as trustees of the plan were not aware of the large payment in 2000.
The former chief executive had been assured by trustees of one scheme of the payment.
He later argued his calculation from the surplus should be based upon the larger amount.
Lord Sumption, at the Privy Court, agreed with Fraser that communications had confirmed the amount at the time of the transfer in 2000.
He ruled that because the trustees delegated administrative functions, including communicating with contributors and confirming entitlements, they were the “ultimate source” of authority for the scheme.
Chris Stewart, senior associate at Nabarro, said: “Where there isn’t any decided law the courts will look to Privy Council decisions in Commonwealth countries.”
He said Fraser was able to rely on the fact he would have acted differently had he been aware of the smaller payment and it would now be more difficult for trustees to get back overpaid money.
The ruling means preventing mistakes cropping up in the first place is now more crucial than ever.
Avoid costly mistakes
To prevent mistakes, schemes should ensure member data are kept up to date, communicate any scheme changes effectively, tighten up relationships and prioritise transparency.
“Often in schemes, factors will change," said Stewart. "Trustees must ensure a proper record is kept.”
Dealing with changes immediately and making decisions on matters like transfers and guaranteed minimum pension equalisation will promote healthy record keeping and minimise risk of unchangeable mistakes creeping in.
Such decisions should be documented in the minutes with clear, active language.
Don’t hide any mistakes – be up front
Clive Wickenden, Capita Hartshead
Hannah Clarke, pensions consultant at Ferrier Pearce, said problems in record keeping happened when schemes lost touch with members, or when members did not understand it was their responsibility to report errors.
Regular communications through payslips with members will encourage good practice in coming forward with errors.
Data about member addresses, pay and change of circumstances such as moving into care homes should be collected.
“Be definitive on benefit statement about what the member has or needs," added Clarke. "Avoid a one-size-fits-all communication. Just keep it simple.”
Schemes with good administrator relationships, responsible for calculating benefits and collating member data, will be less likely to make mistakes with payments.
Wickenden said the administration manual was the “bible” of delegating responsibility.
Schemes must make sure administrators are fully aware of deeds and amendments and also the scheme rules, which should be kept up to date in the manual.
“Problems may occur during scheme mergers or when employers go into liquidation, when extra sections come into schemes,” Wickenden added.
"No one should be timid or frightened about coming forward. Don’t hide any mistakes – be up front.”
Administrators should test benefit calculations before applying them to the scheme.
Setting up an administration sub-committee can mean mistakes are dealt with more quickly as it is easier to arrange meetings and be proactive.
