The Pensions Ombudsman - a learning journey
Posted: 1 April 2021
The Pensions Ombudsman - a learning journey
A now familiar part of the pensions establishment, the Pensions Ombudsman is 30 years old. Introduced by the Social Security Act 1990, the Ombudsman’s office opened on 2 April 1991. The Ombudsman was intended to promote a quicker, less formal method of resolving pension disputes as distinct from the expense and complexity of High Court litigation.
In order to appreciate how much things have changed in that time, it is necessary to recall the context in which pension schemes operated 30 years ago, a time regarded by some as the highwater mark of traditional occupational pension provision in the UK. Final salary schemes were still the norm in the private as well as the public sector, particularly among larger employers. In many occupations it was still expected that an employee would spend the majority of his or her working life with the same employer. Final salary schemes were often in surplus, to such an extent that in 1986 legislation had been brought in to control over-funding. Arguments were typically about how to spend that largesse rather than worrying about the funding and security of past promises. The ramifications of the legal decision in GRE v Barber in May 1990 and the potential costs involved were not generally appreciated; the tax framework under which schemes operated was stable. The flight from final salary to defined contribution still lay ahead.
Why then was it necessary to set up a new dispute resolution process? The principal reason was probably that the extent of wealth tied up in pension rights and assets was beginning to be better understood. In periods of stable employment an employee could easily build up substantial final salary rights over a 20- or 30-year period. It became commonplace to bracket a pension with a house as the most significant financial assets many people were likely to own. Well publicised debates about ’who owns the surplus’ and the growing interest and understanding of pension matters by trades unions was beginning to seep into the public consciousness. And it became more important to assert and protect those rights when social and economic changes were beginning to lead to higher unemployment and a less secure workforce. There was no Pension Protection Fund safety net. Pensions were worth fighting about.
Since pensions are undoubtedly complicated, complaints and disputes about them tend to be complicated as well and the point at issue not always obvious. Disputes may arise from a simple misunderstanding. Scheme members may not understand the terms of their scheme, the part trustees play in running it, and the information they are given in the form of booklets, announcements and benefit statements. At worst, members may not have read the information at all. These attitudes were in the writer’s experience more prevalent in the early 1980’s than perhaps they are today. An important pensions announcement was to be made to the employees of a large company. Since it was important that it went out by a particular date, there was consternation when it was discovered that insufficient copies of the announcement had been printed. Consternation, until an experienced divisional manager was consulted. “Don’t worry” he counselled. “If we do it in two halves, there’ll be enough spares in the bin after the first drop to make up the difference.” He wasn’t joking.
Mistakes in pensions administration, such as an erroneous pensions quotation or inaccurate member data, play their part as well. These sorts of mistakes need to be corrected as quickly and easily as practicable.
There are disputes on legal points. These might include differences in the interpretation of a particular scheme rule (such as disputes over indexation clauses) inconsistencies between formal rules and explanatory booklets, the validity of scheme changes and compliance with general law such as that on sex equality. In 1990, the legal basis of members’ pension rights was less well understood than it is today. The principal legislation related to tax, and technical matters such as preservation or contracting out. There had been comparatively few legal cases which had reached the Courts: practices which were widely adopted and accepted had not yet been challenged nor the impact of EU law always fully appreciated.
Because of the complexity of these issues, it became generally accepted that a way should be found for complaints and disputes to be settled by a process less daunting to the average member. Much of the discussion at the time was not whether an alternative to High Court litigation was desirable, but whether an Ombudsman was preferable to a Pension Tribunal. When it was decided to proceed with the Ombudsman (the first incumbent was appointed on 1 October 1990) the result was part revolutionary and part evolutionary. Revolutionary in its inquisitorial approach, lack of formal pleadings and its handling of complaints free of charge. Evolutionary in its emphasis on the early resolution of disputes and the use of volunteer professionals to sift the evidence, identify the nature of dispute involved and, where possible, to broker a resolution. This had been the function of the Occupational Pensions Advisory Service, (originally set up as a charity and subsequently the recipient of public funding) and its approach as an informal first step in trying to resolve a dispute was strikingly confirmed by the new legislation. OPAS has now been subsumed into the Ombudsman’s office.
The Ombudsman was not universally popular in the early days. Some employers and trustees worried that a free service might lead to vexatious claims or felt that the Ombudsman was biased in members’ favour. It took time to establish a good working relationship between the Ombudsman and the judiciary. People were unused to the flexibility and inquisitorial nature of the Ombudsman’s remit. And the Ombudsman was appointed at a time when significant legal and regulatory changes were just round the corner and challenges to the old ways of doing things were already underway. Alterations in the legal framework under which many final salary schemes had been established have left a legacy of employer scepticism which may well frustrate pension design innovation.
And yet with the perspective of 30 years’ hindsight, one can see that members are better protected under a clearer legal framework, scheme governance is taken more seriously and complaints about pension rights can be pursued more easily. Disputes can’t be hidden under the carpet: employers, trustees and providers have to take them seriously. The 30-year-old Ombudsman has been an important part of this welcome change.
Director, The Pensions Archive Trust