The Pensions Ombudsman has ordered the trustees of a defined benefit scheme that is about to buy out to pay arrears and interest dating back to 2001, finding that the scheme’s forfeiture clause is not effective. 

The case will be expensive for the European Metal Recycling Scheme, which has been ordered to pay the outstanding balance of Mrs P’s pension and GMP from 2001 plus interest to her estate.  In a complaint brought by her son, the trustees had argued that Mrs P’s spouse’s pension had been forfeited, but the ombudsman found the wording of the forfeiture clause meant it did not have effect. 

In 1996, Mrs P had started to receive a spouse’s pension of £8,311.44 a year, including GMPs, as her husband had died at work. However, for reasons the scheme and its administrator did not know, her spouse’s pension stopped being paid in 2001, when she moved to Turkey. The same year, she took her husband’s employer to court over health and safety at work, receiving a large lump sum.  

Mrs P did not contact the scheme to claim her pension before she died in 2020. An attempt by the scheme to trace her with the help of the Department for Work and Pensions was unsuccessful, likely because the administrator held an incorrect date of birth. The DWP did not respond, despite paying Mrs P’s state pension into a UK bank account until her death. 

In ordering the scheme to pay the full arrears, ombudsman Dominic Harris disagreed with an adjudicator who had backed the trustees’ view that arrears should be limited. Harris based his decision on a key 2021 forfeiture case. 

Under the European Metal Recycling scheme rules, the trustees had discretion to forfeit scheme benefits which were unclaimed for more than six years, and eight years for GMPs. However, Harris said that “given the very similar operative wording in the Scheme’s forfeiture clause and that Axminster Carpets clause, I find that I should follow the precedent set in that case”. 

In Axminster, Mr Justice Morgan expanded on his Lloyds judgment, ruling that the forfeiture clause was not effective because it did not expressly say that benefits were forfeit if left unclaimed. 

Harris argued that any wording operating to take away member benefits must be clear: “The general position in case law is that a forfeiture clause must contain some wording which directly deals with the forfeiture of an entitlement of benefits. It need not include the word ‘forfeiture’, but it should operate so as to have the same effect.”  

He added: “This is in contrast to a rule which simply enables trustees to apply monies that have not been claimed within six years of their due date for some other reason, but does not operate so as to firstly forfeit or deprive the member of the benefit.” 

According to TPO, the scheme’s rules stated that “any monies payable out of the Plan and not claimed within six years from the date on which they were due to be paid may at the Trustees’ discretion be used for any of the purposes of the Plan”. 

Unlike in Axminster, the clause in this case was headed, ‘Lien on benefits and forfeiture’, and Harris admitted that “the inclusion of the heading adds some weight in favour of the draftsman intending it to be a forfeiture clause”. However, he continued to maintain that the similarity of the operative wording meant that he should follow the ruling in Axminster. 

Harris added that while the scheme considered Mrs P a missing beneficiary, “in my view her situation should be treated more in the category of being an ‘underpayment of benefits’”, even if she might later have reasonably been seen as a missing beneficiary. 

Considering whether someone was ‘missing’ or ‘underpaid’ is the most important take-away from the determination, believes Richard Meers, a senior associate at Arc Pensions Law.  

“Trustees need to properly consider the circumstances in which the underpayments have arisen,” he said. 

The ombudsman found that Mrs P should be treated more as underpaid “on the basis that the spouse’s pension may have stopped because of a mistake on the part of the administrator or the then trustees in 2001, despite that being unclear, and the scheme had been funded on the basis that the spouse’s pension would be paid until death”, noted Meers. 

The case underlines that trustees need to be alive to whether or not the scheme rules contain forfeiture provisions, and their wording, he said, including the possibility that a heading including the word ‘forfeiture’ might not be enough to ensure it is valid. 

How much effort is put into tracing was also questioned by Mrs P’s estate. Trustees need to take reasonable steps to trace missing beneficiaries, said Meers, but “what is reasonable depends on the circumstances”.  

He noted that an incorrect date of birth was used to trace Mrs P. Although it was not covered in the determination, the expectation might have been that the trustees should have taken further steps to trace the member, including following up with the DWP, he suggested. 

He also highlighted the fact that at the same time the pension stopped, the widow received a large lump sum after legal action over her husband’s death. “It was unclear why her pension had stopped then. This shows the importance of maintaining documentation and proper records,” he said. “If that had been done in this case, then a proper explanation for the cessation of the spouse’s pension may have transpired, which could have had a bearing on the case.” 

It will be interesting to see whether this determination is appealed to the High Court, he said, although there is a possibility the case might end here. Meers noted that the trustees had already paid the last six years’ worth of pension payments and eight years of GMP payments plus increases – around £52,000 – to the estate of Mrs P before the son went to TPO. 

While the extra years of pension payments the scheme has now been ordered to pay are likely to be a large liability, the fact the scheme is planning to buy out and wind up soon might mean that the trustees want a swift end to the story. 

“An appeal may not be worthwhile for the scheme,” observed Meers. 

European Metal Recycling has been contacted for comment.