Under most construction contracts, the contractor takes on the ground conditions risk. However, a recent case has demonstrated that the risk can fall on the employer.
Mrs R was employed by Trafford Council but resigned due to ill-health in August 2011. In June 2014 she applied for early payment of her deferred pension benefits in the Local Government Pension Scheme (LGPS) on the grounds of ill-health. Trafford obtained an opinion from an independent registered medical practitioner (IRMP). Trafford then rejected her application on the basis that it was not clear from the IRMP’s opinion whether she met the criteria for early release of pension benefits due to ill-health.
Mrs R appealed this decision under the internal dispute resolution procedure (IDRP). Trafford got a further opinion from another IRMP. However, that opinion confirmed that Mrs R did meet the criteria for early release of pension benefits.
Trafford rejected Mrs R’s appeal under stage one of the IDRP on the basis that, although it accepted that Mrs R met the criteria for early payment of pension benefits, Trafford still had a discretion whether to agree to payment of those benefits or not. Trafford's reason for refusing consent was that they might face a capital cost of over £400,000 if they agreed. They also felt that paying this sort of sum would result in a loss of confidence in them as a public authority.
Mrs R then appealed to the Greater Manchester Pension Fund (GMPF) at stage two of the IDRP. They also rejected Mrs R’s appeal.
Mrs R then complained to the Pensions Ombudsman. In particular, she complained that:
- Trafford did not have a discretion about whether to agree to early payment of her benefits if she met the criteria;
- The cost to the public purse was not a relevant consideration, and took no account of the contributions that she had paid to the LGPS since joining in 1986;
- Trafford should publish a policy if they did have a discretion, setting out how it would exercise this discretion;
- Potential loss of public confidence was not a relevant consideration, as information about the award of her benefits should not be released into the public domain; and
- She would not have resigned if she had not been told that ill-health retirement was an option she could pursue after her employment ended and she, on this basis, had a legitimate expectation that she would receive her benefits if she met the qualifying conditions.
Trafford maintained that they did have a discretion whether to agree her request and that cost was a relevant factor. However, they accepted that because GMPF gave them a capital cost allowance each financial year to offset the cost of ill-health and other early retirements, it was only the amount of any overspend that would be payable to the GMPF. They accepted that the decision would be unlikely to come into the public domain but maintained that it would not be well received if it did become public knowledge.
The Pension Ombudsman concluded that Trafford did have a discretion whether to agree Mrs R’s request or not on the particular wording of the regulation. It explained that Trafford was entitled to take its own interests into account but was not entitled to make an irrational or perverse decision, as might be the case if it overrode member’s legitimate expectations. Employers may not exercise their powers so as to seriously damage the relationship of confidence between employer and employee.
The Pensions Ombudsman decided that Trafford was entitled to take its own financial interests into account but concluded that Trafford had not properly considered what the actual cost to it would be. It found that there was no immediate cost but only a hypothetical cost which would be dependent on other applications for early retirement being agreed and causing Trafford to exceed the capital allowance given to them by GMPF.
The Pensions Ombudsman did not accept that there would be a loss of public confidence. No evidence of this had been provided, and he pointed out that, although her benefits would be substantial, she did meet the criteria for early payment and that this was a circumstance that the scheme specifically catered for. He also noted that Mrs R had been contributing towards the benefits throughout her long service.
The Pensions Ombudsman upheld Mrs R's complaint and directed Trafford to reconsider the decision. In particular, they should consider the amount of the capital allowance that remained available to them in April 2015 and could also approach the scheme actuary for information about any effect on their regular employer contribution rate going forward.
He also ordered that Trafford pay Mrs R £500 for distress and inconvenience in failing to deal with her application properly.
Given cuts to local authority funding and the high cost of funding early retirement pensions on the grounds of ill-health, this decision, that employers may take their own financial interests into account when exercising a discretion, is welcome. It is important to note that there must be evidence of an actual financial effect rather than merely a hypothetical cost. Employers will, therefore, need to show (both when considering ill-health retirement and other discretionary decisions with financial implications) that they have considered the actual cost to them in granting the benefit.
It is also important to note that the Pensions Ombudsman did not decide that all decisions about ill-health retirement are discretionary. This decision concerned regulation 31 of the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007. The wording governing ill-health benefits for deferred members in the 2013 Regulations is similar. However, the wording around retirement on ill-health grounds for active members is different and it seems likely that there is no discretion for employers where the criteria are met and the member is dismissed on the grounds of ill-health.
For more information
For further advice concerning ill-health retirement and a range of other pensions matters please contact Doug Mullen.
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