Lump sum death benefits and trustee discretions.

15th December, 2022

  • Ombudsman refuses to give trustees second chance

    In this determination – Mr Y, PO-24832 – the Pensions Ombudsman upheld a complaint that the trustees of the pension scheme failed to consider the complainant as a possible beneficiary of a lump sum death benefit. However, notwithstanding the upholding of the complaint, the Ombudsman, unusually, did not remit the matter back to the trustees. The reason for this was that he concluded they would just make the same decision again. 

    The facts of the case were that Mr Y was, until his death, a member of the Pat Eddery Pension Fund. He was divorced and had a 23-year-old son, also Mr Y, who was a potential recipient of lump sum death benefits under the Fund. The divorce was intended to be a ‘clean break’ that provided a final financial settlement for his family. Moreover, the late Mr Y nominated only Ms O, his new partner, in his death benefit nomination form and he also left her his entire estate. 

    Ms O was a trustee of the Fund, and an additional trustee was also appointed to address the obvious conflict of interest. Together, the trustees decided to distribute the death benefits to Ms O; it was understood that she planned to use them to pay off the debts of the deceased member’s estate. 

    Mr Y (the son) complained to the Pensions Ombudsman, arguing that the trustees had not exercised their discretion properly. 

    In his determination, the Pensions Ombudsman upheld the complaint.  

    Normally, in these circumstances, the decision would be remitted back to the trustees and they would be given the chance to reconsider it. In this case, however, the Ombudsman did not do this because, he concluded, they would just make the same decision. 

    In a bit more detail, the Ombudsman can only overturn a decision if the trustees had asked the wrong questions, considered irrelevant factors or reached a perverse decision; i.e. not followed a correct process.  

    In this case, the trustees had decided that Mr Y was a potential recipient of the lump sum death benefit. Nevertheless, they were then wrong to proceed on the basis that the divorce settlement precluded Mr Y from benefitting. Also, in deciding that the nomination and the terms of the will precluded a payment being made to Mr Y, they had not really exercised a proper discretion. The trustees process was then flawed. 

    All of this said, the Ombudsman saw no point in remitting the decision to the trustees because the outcome would be the same.  

    In consequence, the decision stood. However, the Ombudsman awarded Mr Y £500 compensation for distress and inconvenience. 

    The case is a useful reminder of trustee duties when exercising discretion over death benefits. The trustees should make reasonable enquiries as to potential beneficiaries, should not treat nomination forms as binding and need to manage conflicts. 

    The case is also interesting because of the Ombudsman decision not to remit the flawed decision back to the trustees and asking them to ‘think again’. Whilst the Ombudsman thought that there was no point, as the outcome would not change, it is unusual for the Ombudsman to effectively take decisions on behalf of trustees.  

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    • Published bySusan McFarlane

      Susan leads the marketing function for Dalriada Trustees Limited, and our sister company, Spence & Partners.  The marketing team handles all promotional activity for the companies including business development, marketing, events and PR. Susan joined the business in January 2013, having...

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