Tax free lump sum overpayment

DRS1

Albermarle said:

I wonder what would happen if you just ignored all the letters and never responded. Or just said you have spent it and can not afford to pay it back. Presumably your monthly pension would reduce, but would they actually come after you for the refund of overpayment? I mean take you to court eventually? 
Plus some of these pension administrators are pretty incompetent and very slow at doing anything, so it could drag on for years.
Could be they might just give up and write the money off?

I don't think the trustees of the pension scheme could write the money off.  That would be a breach of trust.  I think there have been cases where they took the member to court - probably that is where the Pensions Ombudsman gets some of his answers from in the article posted earlier..

But it may be that the administrators carry some sort of negligence insurance which may pick up the tab?  Still maybe the insurer would then step in and try to claim the money back.  So don't get your hopes up.

What did the OP do with the lump sum?

MarkCarnage

Trustees will only write off if it's deemed uneconomic to pursue it e.g. small amount, or unrealistic to expect recovery (e.g. member has subsequently died). 
Some of the errors quoted here are pretty significant, and suggests very weak sign off procedures at the administrators concerned. That in itself doesn't surprise me. Also, in schemes with multiple sections/complicated rules it increases the chances of error significantly. A number of administrators are working off legacy systems which can't really cope with this so a lot of manual calcs done, some clearly not very well. 
It is very difficult to claw back from adminstrators unless they have been grossly negligent or there has been fraud involved. Believe me....as a Trustee I have seen cases where I think how can they not be liable for this and the legal advice is that they are unlikely to be liable. 
An audit of administration can produce some quite scary results. Many of the errors are small enough that it's understandable they haven't been picked up or noticed by the beneficiary, but I've seen one or two really bad ones on CETVs where the numbers are a lot bigger. 

QrizB

Unless the OP comes back with some more info, we're just speculating.

100% overpayment on a £2k pa pension is easier to adjust to than on a £25k pa one.

Pat38493

MarkCarnage said:

Trustees will only write off if it's deemed uneconomic to pursue it e.g. small amount, or unrealistic to expect recovery (e.g. member has subsequently died). 
Some of the errors quoted here are pretty significant, and suggests very weak sign off procedures at the administrators concerned. That in itself doesn't surprise me. Also, in schemes with multiple sections/complicated rules it increases the chances of error significantly. A number of administrators are working off legacy systems which can't really cope with this so a lot of manual calcs done, some clearly not very well. 
It is very difficult to claw back from adminstrators unless they have been grossly negligent or there has been fraud involved. Believe me....as a Trustee I have seen cases where I think how can they not be liable for this and the legal advice is that they are unlikely to be liable. 
An audit of administration can produce some quite scary results. Many of the errors are small enough that it's understandable they haven't been picked up or noticed by the beneficiary, but I've seen one or two really bad ones on CETVs where the numbers are a lot bigger. 

Out of interest - are the errors evenly balanced between overpayments and underpayments?

Also - do the trustees have a bespoke contract with the administrators or is it something that’s standardised somehow?  If it’s bespoke, I am wondering why the trustees or sponsoring employer, cannot write the contract in such a way as to put penalties in for the administrator so that they are forced to do things correctly or pay penalties.

I would even also wonder why there isn’t pressure nationally from any DB member groups or something to get the law changed in this area to force more accountability onto them, and if it’s a significant issue, surely government / HMRC has an interest as under paid pensions means less tax for them?

Tommyjw

Pat38493 said:

MarkCarnage said:

Trustees will only write off if it's deemed uneconomic to pursue it e.g. small amount, or unrealistic to expect recovery (e.g. member has subsequently died). 
Some of the errors quoted here are pretty significant, and suggests very weak sign off procedures at the administrators concerned. That in itself doesn't surprise me. Also, in schemes with multiple sections/complicated rules it increases the chances of error significantly. A number of administrators are working off legacy systems which can't really cope with this so a lot of manual calcs done, some clearly not very well. 
It is very difficult to claw back from adminstrators unless they have been grossly negligent or there has been fraud involved. Believe me....as a Trustee I have seen cases where I think how can they not be liable for this and the legal advice is that they are unlikely to be liable. 
An audit of administration can produce some quite scary results. Many of the errors are small enough that it's understandable they haven't been picked up or noticed by the beneficiary, but I've seen one or two really bad ones on CETVs where the numbers are a lot bigger. 

Out of interest - are the errors evenly balanced between overpayments and underpayments?

Also - do the trustees have a bespoke contract with the administrators or is it something that’s standardised somehow?  If it’s bespoke, I am wondering why the trustees or sponsoring employer, cannot write the contract in such a way as to put penalties in for the administrator so that they are forced to do things correctly or pay penalties.

I would even also wonder why there isn’t pressure nationally from any DB member groups or something to get the law changed in this area to force more accountability onto them, and if it’s a significant issue, surely government / HMRC has an interest as under paid pensions means less tax for them?

I'd imagine it's not too disimilar to the idea of the potential costs putting IFA's off doing DB work , DB administrator companies would not want the risk (and there isnt a huge amount of choice for Trustee's of companies to look after it) or would take it at a much larger contract fee (at a time where many DB Schemes struggle for funding as it is). That said, i do agree it should be something that exists, a well written clause/contract could negate any potential thin lines where it could be classed as the employers fault or previous admins fault if the error was only spotted but not caused by a new company for example.

I've seen all manner of options offered by a Trustee , all of them would generally only be after initially asking for it all back so it's worth just pushing back and delaying and seeing what happens. E.g.

• We'll reduce the pension to the correct amount, but forget about paying the overpayment back
• Pay us back £10k of the £20k and we'll call it quits
• We'll freeze your pension (no annual increases) until the overpayment is made up 
• We'll deduct £x per month over a period of Y years but not so much it has a material impact on your pensin

Or an option being incredibly more common now if the value of benefits is of the right amount.. don't pay us back but one day soon we'll wind the Scheme up and when we do we will pay you less (or no) winding up lump sum  that you would have been entitled to otherwise, and claim the overpayment back that way.

I've personally not seen an overpayment case get so far as the court, one way or the other it goes through the complaints process, the Ombudsman and the member wins in some way (e.g. like some of the above, ultimately some agreement to pay back less) and the memebr does so immediately/over-time.

MarkCarnage

Pat38493 said:

MarkCarnage said:

Trustees will only write off if it's deemed uneconomic to pursue it e.g. small amount, or unrealistic to expect recovery (e.g. member has subsequently died). 
Some of the errors quoted here are pretty significant, and suggests very weak sign off procedures at the administrators concerned. That in itself doesn't surprise me. Also, in schemes with multiple sections/complicated rules it increases the chances of error significantly. A number of administrators are working off legacy systems which can't really cope with this so a lot of manual calcs done, some clearly not very well. 
It is very difficult to claw back from adminstrators unless they have been grossly negligent or there has been fraud involved. Believe me....as a Trustee I have seen cases where I think how can they not be liable for this and the legal advice is that they are unlikely to be liable. 
An audit of administration can produce some quite scary results. Many of the errors are small enough that it's understandable they haven't been picked up or noticed by the beneficiary, but I've seen one or two really bad ones on CETVs where the numbers are a lot bigger. 

Out of interest - are the errors evenly balanced between overpayments and underpayments?

Also - do the trustees have a bespoke contract with the administrators or is it something that’s standardised somehow?  If it’s bespoke, I am wondering why the trustees or sponsoring employer, cannot write the contract in such a way as to put penalties in for the administrator so that they are forced to do things correctly or pay penalties.

I would even also wonder why there isn’t pressure nationally from any DB member groups or something to get the law changed in this area to force more accountability onto them, and if it’s a significant issue, surely government / HMRC has an interest as under paid pensions means less tax for them?

I would say that there is a bias to overpayments, but I rationalise this on the basis that significant underpayments are picked up by the member before it goes into payment. Funnily enough, not as many of them query erroneous overpayments at that time.....
Contracts tend to be more bespoke for larger schemes but still with a lot of standard clauses. Yes, there can be penalties for some things, but often the SLA is written in a way that the administrator marks their own homework....where they've made an absolute howler of something yes they do carry the can sometimes. If more onerous terms were forced on them their contract pricing would just go up. 
DB pension admin became a commoditised business, bit like custodians. However, it did so before a lot of quite onerous and complicated changes came into the pensions landscape (LTA, GMP equalisation etc), and before a lot of pensions went into payment which uncovers data issues and problems. Some practices were discretionary but never codified....I could go on....
The biggest issue with CETVs were generally those where the administrator had been slow in providing the numbers, so the deadline was missed, and another quote was needed....which came in significantly less than the first one. I haven't seen many cases go in favour of members (in many cases it's their fault or their IFAs) but when they have, it's been 6 figure amounts. 
As @Tommyjw says, there are various ways to skin the cat in recovering monies and some agreement is almost always reached. Only time I saw an Ombudsman case go in favour of member almost unconditionally was where they had queried it more than once and been assured it was correct. Even then, the pension in payment was corrected, just no recovery of overpayment to date.  

Pat38493

MarkCarnage said:

Pat38493 said:

MarkCarnage said:

Trustees will only write off if it's deemed uneconomic to pursue it e.g. small amount, or unrealistic to expect recovery (e.g. member has subsequently died). 
Some of the errors quoted here are pretty significant, and suggests very weak sign off procedures at the administrators concerned. That in itself doesn't surprise me. Also, in schemes with multiple sections/complicated rules it increases the chances of error significantly. A number of administrators are working off legacy systems which can't really cope with this so a lot of manual calcs done, some clearly not very well. 
It is very difficult to claw back from adminstrators unless they have been grossly negligent or there has been fraud involved. Believe me....as a Trustee I have seen cases where I think how can they not be liable for this and the legal advice is that they are unlikely to be liable. 
An audit of administration can produce some quite scary results. Many of the errors are small enough that it's understandable they haven't been picked up or noticed by the beneficiary, but I've seen one or two really bad ones on CETVs where the numbers are a lot bigger. 

Out of interest - are the errors evenly balanced between overpayments and underpayments?

Also - do the trustees have a bespoke contract with the administrators or is it something that’s standardised somehow?  If it’s bespoke, I am wondering why the trustees or sponsoring employer, cannot write the contract in such a way as to put penalties in for the administrator so that they are forced to do things correctly or pay penalties.

I would even also wonder why there isn’t pressure nationally from any DB member groups or something to get the law changed in this area to force more accountability onto them, and if it’s a significant issue, surely government / HMRC has an interest as under paid pensions means less tax for them?

I would say that there is a bias to overpayments, but I rationalise this on the basis that significant underpayments are picked up by the member before it goes into payment. Funnily enough, not as many of them query erroneous overpayments at that time.....
Contracts tend to be more bespoke for larger schemes but still with a lot of standard clauses. Yes, there can be penalties for some things, but often the SLA is written in a way that the administrator marks their own homework....where they've made an absolute howler of something yes they do carry the can sometimes. If more onerous terms were forced on them their contract pricing would just go up. 
DB pension admin became a commoditised business, bit like custodians. However, it did so before a lot of quite onerous and complicated changes came into the pensions landscape (LTA, GMP equalisation etc), and before a lot of pensions went into payment which uncovers data issues and problems. Some practices were discretionary but never codified....I could go on....
The biggest issue with CETVs were generally those where the administrator had been slow in providing the numbers, so the deadline was missed, and another quote was needed....which came in significantly less than the first one. I haven't seen many cases go in favour of members (in many cases it's their fault or their IFAs) but when they have, it's been 6 figure amounts. 
As @Tommyjw says, there are various ways to skin the cat in recovering monies and some agreement is almost always reached. Only time I saw an Ombudsman case go in favour of member almost unconditionally was where they had queried it more than once and been assured it was correct. Even then, the pension in payment was corrected, just no recovery of overpayment to date.  

Thanks that is interesting.  Seems to me that there must still be billions in those schemes, even though it will reduce over time.  I still find it a bit odd that these things seem to happen fairly regularly with DB schemes, but if a bank or a company payroll department was making these type of mistakes regularly they would end up out of business and/or in trouble with the FCA pretty quick.  Also if a bank said - yes we know you have requested a transfer of your funds from your account to an account at another bank, but we''ll get around to it maybe in a few months, and by the way we won't communicate with you at all in the meantime, again I think this would be seen as completely unacceptable.

I guess the other question underneath - I know this is an extreme example, but what is a DB scheme became insolvent due to consistent errors/overpayments by admins that were never detected over years?  Is anyone legally accountable there - admins / trustees / sponsoring company?

Then - I am almost scared to ask this, but who is responsible for making the calculations every few years that determine the solvency of the scheme?  Is it by any chance the same people that are making these errors?

AlanP_2

I think there is a point here that not all DB scheme are administered the same. 

Some, not all, DB schemes have in-house admin teams e.g. Local Gov. Any mistakes the employees of the LA who run the admin side make would either have to be paid by the scheme members and / or taxpayers if the member is not going to repay for whatever reason.

Which of those are you in favour of?

Can you imagine the comments you would see in the media if council tax went up somewhere because a pension admin team had made big mistakes over a period of time and decided it was too much hassle get money back from pensioners.

Pat38493

AlanP_2 said:

I think there is a point here that not all DB scheme are administered the same. 

Some, not all, DB schemes have in-house admin teams e.g. Local Gov. Any mistakes the employees of the LA who run the admin side make would either have to be paid by the scheme members and / or taxpayers if the member is not going to repay for whatever reason.

Which of those are you in favour of?

Can you imagine the comments you would see in the media if council tax went up somewhere because a pension admin team had made big mistakes over a period of time and decided it was too much hassle get money back from pensioners.

Understood - my questions are mainly focussed on private DB schemes where the administration has been outsourced to a provider (and often then further outsourced to another offshore provider according to my impression).

My suspicion is that public sector schemes are less likely to make such errors, and also, at least in my personal experience (spouse), they are more likely to get the payments in place on the requested date.

Silvertabby

Pat38493 said:

AlanP_2 said:

I think there is a point here that not all DB scheme are administered the same. 

Some, not all, DB schemes have in-house admin teams e.g. Local Gov. Any mistakes the employees of the LA who run the admin side make would either have to be paid by the scheme members and / or taxpayers if the member is not going to repay for whatever reason.

Which of those are you in favour of?

Can you imagine the comments you would see in the media if council tax went up somewhere because a pension admin team had made big mistakes over a period of time and decided it was too much hassle get money back from pensioners.

Understood - my questions are mainly focussed on private DB schemes where the administration has been outsourced to a provider (and often then further outsourced to another offshore provider according to my impression).

My suspicion is that public sector schemes are less likely to make such errors, and also, at least in my personal experience (spouse), they are more likely to get the payments in place on the requested date.

Retired LGPS administrator here.  Most errors are - or were -  picked up at the checking stage.  Towards the end of my time there, I was picking up more errors simply because the junior staff were placing too much faith in the computer system, and just couldn't 'see' that the final figures churned out were obviously wrong.  

One record I checked was a deferred into payment, having been deferred for some 20 years.  The final (maximum commutation) lump sum and pension were huge in relation to the service and leaving salary, so I asked the young chap who had produced the quote if he had checked all the original figures.  "No need", said he with all the confidence of youth and a computer "it would have been checked 20 years ago, and now the computer says....."

The annual GMP figures had been input as the weekly figures, so the computer not only multiplied the GMP elements by 52 but it had also added 20 years of GMP increases.  That took some explanation, and the pensioner (having based his retirement plans on his annual benefit statements) went to the Ombudsman.  He was awarded a few £s of compo, but his pension and lump sum were reduced to the correct amount.

On the plus side, any underpayment errors are corrected and arrears paid.