Ensuring employees are aware of pension choices – points to consider

Thankfully most employers are aware of their statutory obligations when advising employees of their pension benefits, especially in relation to auto enrolment or changes in the company pension scheme.
However, the recent decision of the Deputy Pensions Ombudsman in a complaint by the estate of a deceased employee against Belfast City Council (BCC) highlights that an employer’s obligations can go further than these statutory examples. The Ombudsman decided that employers are also required to make appropriate enquiries and provide sufficient advice to employees to ensure that they are able to make the best choices regarding their pension benefits.
Background
Mr Y was an employee of BCC. He was diagnosed with cancer in 2012. In May 2013, he was recommended for early retirement on grounds of permanent ill-health. His three-month notice period started on 26 May 2013 and was due to end on 17 August 2013. Unfortunately, on 24 July 2013 Mr Y was informed that his diagnosis was terminal. According to Mrs Y, she telephoned BCC the same day to tell them of Mr Y’s condition and enquired about the option of taking some of his benefits before his termination date so they could take a family holiday prior to him receiving further treatment. BCC disputed this position. They argued that Mrs Y only requested payment of a lump sum for the holiday and had never asked that Mr Y’s wider benefits be brought forward.
Mr Y died three days before the expiry of his notice period. This meant that Mrs Y was entitled to a death in service payment. This was significantly lower than the benefit for death in retirement to which she would have been entitled if Mr Y’s employment had ended.
Decision
The Ombudsman favoured Mrs Y’s account and held that BCC “ought reasonably to have enquired” as to whether Mr Y wished to waive his remaining notice period, even though Mrs Y had not specifically requested about this.
Implications for employers
Employers should be aware that pension scheme members will usually find it more cost-effective to complain to the Pensions Ombudsman than to sue in the courts. An Ombudsman may aim to reflect what is fair and reasonable in the circumstances so Ombudsman decisions are less predictable than those of the courts, which are bound by existing case law and rules of evidence.
This decision suggests a widening of the employer’s obligations to advise employees about different options available when discussing pension benefits. It means that once an employee enquires about their pension benefits or communicates a relevant change in circumstances, employers should ensure they highlight the options available – while avoiding giving unauthorised financial advice!
The decision does not sit entirely easily with previous authority that employers do not have an implied duty to warn or advise employees about the potential financial consequences of decisions affecting their pension benefits. However, the House of Lords has held that an employer could have an implied obligation to warn its employees about their pension rights if that right has not been negotiated individually or the employee cannot reasonably be expected to be aware of the particular right unless it is drawn to their attention. Given the complexity of many pension schemes, it would be unwise to rely on employees being aware of all their options.
In light of the above, employers should consider carefully what and how they communicate to their employees about pension benefits. When in doubt, they should seek professional advice to limit the risks of providing inadequate or incorrect information. A practical answer may be to adopt pre-agreed checklists to support benefit payment enquires in common situations, such as actual or expected deaths in service.