Post retirement increases – The case study of Mr P
This complaint concerns the annual increases that have been applied to Mr P’s pension. Mr P believed he has incurred a financial loss because annual increases have been applied to his pension in line with the retail price index (RPI) instead of at a fixed rate of 3%.
Mr P retired and started claiming his pension from the Scheme on 30 April 1999. On 19 March 2018, the Trustee wrote to Mr P and said that following a recent review of his pension it was discovered that some of the annual increases that were applied to his pension in the past were too high. The pension he was currently being paid was also too high. To correct the error, his pension in payment needed to be reduced to reflect the correct amount payable under the Scheme Rules (the Rules).
The reason was because when Mr P started claiming his pension from the Scheme, his annual pension was £62,469.72 which was the maximum allowed by HMRC. Under the Rules, his pension is granted a fixed annual increase of 5%. However, to ensure his pension remained at the maximum allowed by HMRC, his pension increased each year in line with the RPI.
Mr P’s pension was increased correctly in line with the RPI until 1 April 2006. The RPI increase that was due on 1 April 2006 was 2.2%, but the actual increase awarded to his pension was 3%. This resulted in his pension being greater than the maximum amount allowed. Subsequently, since 1 July 2011, the annual increases that were awarded to his pension from 2012 onwards were 5% each year. These increases were again higher than the RPI increases that should have been awarded, to prevent his pension from exceeding the maximum amount allowed.
The incorrect increases resulted in an overpayment of pension amounting to £51,254.52 which needed to be repaid and Mr P’s pension was decreased with effect from April 2018 from £10,203.24 a month gross, to £8,834.89 a month gross.
The Trustee offered to recover the overpayment by either withholding Mr P’s annual increases going forward, until the overpayment was recouped or alternatively, it gave him the option to pay the overpayment in full by cheque.
Mr P agreed with the Trustee to repay the overpayment at £2,000 per month however he remained dissatisfied, and he complained to TPO. In his submissions he said that with the passage of time, he no longer wished to pursue his complaint about the overpayment but said that:
- He understood that his pension should be increased by 5% until the maximum pension allowed has been reached.
- When the maximum pension allowed has been reached, it was his understanding that HMRC allowed increases to be paid at the higher of 3% or the RPI.
- On the occasions when the RPI has been lower than 3%, the Trustee did not agree to increase his pension by 3%.
- He believed the higher of the RPI or 3% should be applied to his annual pension in payment and that the increases should be backdated.
Mr P’s complaint was considered by an Adjudicator who noted that while the Inland Revenue Occupational Practice Notes 2001, provided trustees with the option to increase pensions in payment annually at 3%, when the RPI was less than 3% it was not compulsory for scheme trustees to adopt this revaluation method into their scheme rules. So, there was no maladministration by the Trustee, for not incorporating this revaluation method into the Rules.
The Adjudicator concluded that having reviewed the Rules and the relevant HMRC guidelines the Trustee had correctly recalculated Mr P’s pension and applied the correct annual increases in line with the RPI.
The Adjudicator’s Opinion was accepted by both parties.
Related case studies
Mrs E was a member of the Teachers’ Pension Scheme (the Scheme) and she complained that Teachers’ Pensions (TP) were attempting to recover an overpayment of £13,506.15 from her.
Mr A was in receipt of an ill health pension after a cancer diagnosis in 2014.