The Pensions Ombudsman (PO) recently made a decision, during an appeal, on a settlement agreement that included pension benefits. The agreement promised to increase a Local Government Pension Scheme (LGPS) member’s pension and to allow payment of full pension in the future from the member’s 55th birthday.
In this case, an appeal was made by an ex-employee against their previous employer. The ex-employee, was a member of an LGPS and by the time of appeal was classed as a deferred member. When the LGPS member turned 55 no pension payment was made as promised. As the original employer ceased to exist, a claim was made against the successor employer due to them refusing to honour either part of the agreement.
In the PO’s decision, the promise to increase the member’s pension was declined.
However their decision on the agreement to pay the member’s full pension from their 55th birthday, was that this should be upheld. On the basis that the successor employer could not simply refuse to honour the original promise.
The case resulted in the PO ordering the successor employer to pay the member the equivalent of their full, unreduced benefits from their 55th birthday. Plus a compensation payment of £2,000 for the distress and inconvenience that their maladministration had caused.
What does this mean for your settlement agreements?
When negotiating the terms of a settlement agreement it is advisable that employers do not commit to making any discretionary payment in the future as part of the agreement.
What do the LGPS regulations say?
The LGPS regulations do not make provisions for these promises. They refer to a member, “once he has attained the age of 55”, as being able to elect to receive payment of benefits with the consent of his employer. In both the LGPS 2008 and 2013 regulations, the member can only elect to receive payment of their deferred pension once they have reached age 55. It is only after the election is made, that the employer is able to make the decision to award unreduced benefits.
In other words, making the payment is not an automatic necessity. The onus is on the employee to make an election to receive the pension payment.
It’s key to remember that making such a promise might be affordable as part of the employer’s budget at the time the settlement agreement is made. However, this commitment may not be easily affordable for either the employer or a successor employer at the time the deferred member reaches age 55.
Is there a better way to negotiate pension benefits in the settlement agreement?
If you do enter into negotiations over pensions as part of agreeing a settlement, consider awarding an additional sum. This should be equivalent to the value of the reduction in pension to ensure there is no breach in the regulations.