By their very nature, ill-health early retirement cases are usually emotive. Therefore delays and sloppy procedures are even more likely to lead to complaints from scheme members. The cases also bring out interesting questions about the role and duties of employers and trustees and the way in which trustee discretions should be exercised. The first Ombudsman did not as a matter of policy deal with cases concerning the exercise of trustee discretions, but from 1 November 1994 Dr Farrand lifted this restriction.
Theory
Scheme Rules
Scheme rules will set out the circumstances in which ill-health early retirement pensions may be granted and the degree of ill-health or incapacity required to qualify for such a pension. There are sometimes different levels of pension available eg based on prospective service right up to normal retirement age if incapable of doing any job compared with only half prospective service, or no prospective service, if capable of doing another job. The scheme rules will also determine the level of involvement, if any, required by the trustees and employer.
Trustee role
Unless the trustees are performing a purely factual role (e.g. considering if a member falls within a definition of incapacity) the exercise of the trustees' powers in dealing with ill- health cases will be reviewable in line with [1995] OPLR 79.
In that case Glidewell LJ summarised as follows what trustees must do to avoid a ruling that an exercise of discretion has been invalidly carried out:
"(a) The trustees must ask themselves the correct questions.
(b) They must direct themselves correctly in law; in particular, they must adopt a correct construction of the pension fund rules.
(c) They must not arrive at a perverse decision, ie a decision at which no reasonable body of trustees could arrive, and they must take into account all relevant but no irrelevant factors."
Therefore the process, rather than the substance, of the exercise of a discretion is the key element when a discretionary decision is made or reviewed by the Ombudsman.
Where the trustee decision is a pure question of fact, the Ombudsman has taken the approach (in rare cases) that as he has power to decide questions of fact, he can substitute his own conclusion (sometimes based on his further factual investigations).
Employer duties
In addition to requirements under the scheme rules, must be considered. In that case there was a dispute about whether a member was entitled to an immediate ill-health pension. The scheme rules provided that a pension would become payable if the employer, after consulting with its medical advisers, decided that the member was physically or mentally incapable of undertaking any duties, or had suffered a substantial loss of earning capacity and the condition was likely to be permanent. The employer decided in the light of the facts and on the basis of medical evidence that the member did not meet these requirements. Although the High Court and Court of Appeal upheld the employer's decision it also held that:
"The Bank holds out this pension scheme to its staff as a valuable part of the staff's overall remuneration package. That being so, when one finds that under the rules of the pension scheme certain functions are entrusted to the Bank, it is, in my view, necessarily implicit in the contract of employment that the Bank agrees with the employee that it will duly discharge those functions in good faith. In particular, if a member of the Bank staff will become entitled to payment of an ill-health pension if the Bank is of the relevant opinion concerning the state of health of the employee, it is an implied term of the contract that the Bank will properly consider a genuine claim by an employee that her health qualifies her for an ill-health pension. To my mind it is unthinkable that the position might be otherwise. I was not a little surprised that the Bank through counsel submitted that, indeed, as a matter of law the Bank was under no such obligation to its employees."
Practice
The role of the trustees was considered in case F00026, summarised in the Digest of Cases 1996/97 (at p139) as follows:
"The 56-year-old complainant had an osteoarthritic knee joint, which would not improve, and remedial surgery on which was uncertain in long-term outcome, and designed for pain relief rather than increased mobility. He satisfied the DSS test of incapacity for any work for the purpose of payment of benefit and an award of NI credits. He complained of the trustee's refusal of his application for an ill-health pension and that it dealt with it sluggishly. It had agreed to voluntary early retirement instead.
Result:
The trustee had no proper role to play in granting voluntary early retirement. Its proper role was limited to determining whether or not the complainant had been forced to permanently stop work due to serious ill- health or disability and this had to be decided on medical evidence only, although it was entitled to evaluate the evidence. There was no scope in the wording of the scheme leaflet to allow it to take other factors into account. There was no medical evidence to contradict the group medical adviser's conclusion that the condition would get worse and the complainant was unfit for his work or similar work now or in the foreseeable future. All the other medical evidence pointed to medical retirement. The refusal to pay an ill- health pension was against the weight of medical evidence, and the trustee could not have turned it down had it not taken account of considerations it should not have, or failed to take account of considerations it should. No reasonable trustee would have failed to award the ill-health pension.
It was obliged to expeditiously progress the application, which it failed to do. The delay between November 1994 and June 1995 was unacceptable by which time his sick pay entitlement had expired. There was also failure to provide information.
If it had not acted against the weight of evidence it would have granted the pension, which it seemed reasonable to assume would have started when his contractual entitlement to sick pay expired. He would not have been made redundant in December 1995 nor would the company have had to give him sick pay. The financial injustice was in being deprived of an ill-health pension. However he had the benefit of the sick pay and the redundancy payments. The trustee should notify him of his benefit options, and commence payment of the pension on being told his preference. It should calculate:
- the payments he would have received if he had been granted an ill- health pension on 5 June 1995 less the early retirement pension monies he had received;
- the monies he received in sick pay and redundancy payments.
It should then pay him the difference between (a) and (b), with interest, and GBP 250 to compensate for distress and inconvenience."
The case illustrates the application by the Ombudsman of the test laid down in. In applying the test the Ombudsman concluded that no reasonable trustee could have failed to award the ill- health pension and therefore it must be awarded. It is also interesting to note that a delay of seven months in processing the application was deemed unacceptable and compensation for distress and inconvenience was payable. The Ombudsman almost substituted his view of the medical evidence for the trustee's in deciding that no reasonable trustees could ever have failed to grant an ill-health pension.
In case E00420 the Ombudsman did not go quite so far. The member had injured his shoulder at work. The trustee originally refused the member's application for an ill-health pension. He did not challenge the decision for three years because he did not feel he had enough medical evidence and his injury was still being treated. He did not believe the trustee had taken account of medical reports provided on his behalf but had relied on the report prepared by the company medical officer, Dr MJT. The Ombudsman summarised his approach to the case (at p99) in his Digest of Cases 1996/97 as follows:
"A synopsis by Dr MJT mentioned only the medical reports prepared at the employer's request. It cast doubt on whether the injury was sustained at work, although that had no bearing on the matter. The latest medical report did not deal with his current condition. Correspondence concerning his employment, and a summary of it, was prejudicial. The trustee said it was not taken into account but the fact that it was made available raised the reasonable assumption that it was there as evidence and improperly influenced them. No evidence was requested to support or counter the complainant's statement about the degree of his disability. The fact that he had been assessed as disabled by the DSS ought to have carried some weight. The letter terminating his employment made it clear why he was dismissed, when the medical evidence was taken into account. The chief medical officer's suggestions that the full medical reports be available, and that Dr MJT attend, were not acted on.
The trustee relied on the strict wording of the rules that it "may" obtain a report from a medical practitioner and "may" pay regard to any medical report obtained by the member to justify the limited amount of medical evidence considered. But a fiduciary duty was owed to the member to ensure the rules were applied fairly and reasonably and it could not be seen how the trustee could be satisfied whether a member was likely to be incapacitated permanently or for an indefinite period without full consideration of such available evidence. Of the six orthopaedic surgeons who examined him, three seemed to agree he was incapable of returning to his ordinary work, one expressed no view and the other two had not been asked for a prognosis.
Whilst it might not necessarily have been perverse for the trustee to reject the weight of the medical evidence presented and to fail to require other medical evidence, the decision to refuse a pension appeared to be the consequence of taking other irrelevant factors into account and/or being unduly influenced by some medical evidence and opinion as against others. It was appropriate and equitable for the trustee to look at the complainant's position as at the time he asked for the pension to be reconsidered (ie November 1994). It should reconsider it, taking into account the weight of medical evidence and any further medical evidence it considered necessary. It should have regard only to whether he fulfilled the requirement of the relevant rule. A pension might only be refused if he could be found, as at November 1994, to have been capable in the foreseeable future of doing what was his ordinary work. If they accepted a pension was payable it should be paid from that date, with interest on the arrears."
This case highlights the need for trustees to gather sufficient medical evidence rather than simply rely in all cases on medical reports prepared at the behest of the employer (although the responsibility for gathering medical evidence will vary depending on scheme rules). The fact that the DSS had assessed the member as disabled "ought to have carried some weight" in the view of the Ombudsman. The Ombudsman concluded that he could not effectively substitute his view of the medical evidence and remitted the matter to the trustees for further consideration.
A similar line was taken in case E00054 where the trustees were directed to obtain new independent medical evidence and decide whether in the light of it the complainant met the definition of incapacity.
The issue is increasingly a subject for debate at trustee meetings as more members apply for ill-health pensions, perhaps because of growing awareness about what a valuable benefit it can be. The complainant (in case D11942) saw a specialist on 14 June 1990, was made redundant on 22 June and was registered as blind in July. The trustees refused to consider his application for an ill-health early retirement pension in 1991. They had taken an incorrect view of their ability to grant ill-health pensions under the scheme rules. They also refused to consider the application on the grounds that they would only consent in "exceptional circumstances". The Ombudsman took the following view, as summarised (at p51) in the Digest of Cases 1996/97:
"The restriction, not justified by the rules, was perverse. Trustees must not fetter their discretion by laying down blanket rules, although they might, and indeed ought to, lay down guidelines to ensure consistency. But these must be treated as guidelines, not shackles. Here, the restriction could not be said to be an appropriate guideline."The Ombudsman ordered the trustees to pay an ill-health early retirement pension backdated to when the member applied for one in 1991 plus GBP 500 compensation for distress.
The case suggests that it would be difficult for trustees to suddenly decide that too many ill-health pensions were being granted and therefore should in future only be granted in extreme cases.
It is also interesting to note Dr Farrand's view that trustees ought to have guidelines relating to ill-health pensions to ensure consistency. Although introducing such guidelines may help to avoid maladministration, the trustees' failure in case D12009 to ensure compliance with the procedure laid down for ill-health pension applications was held to be maladministration. Maladministration was also held to have occurred in case B10541 and compensation of GBP 250 was payable. The employer made a member redundant but because of "procedural errors" the member was asked to attend a medical examination and the trust considered the application.
The role of trustees in dealing with applications for ill-health pensions is perhaps best encapsulated in the following words from the summary of case E00207 (Digest of Cases 1996/97 at p18):
"Even where, according to the wording of a trust deed, trustees appeared to have an absolute discretion, this could not be taken at face value. They were not allowed to do what they liked following the dictates of private motivation, and disregarding proper consideration of material factors. The discretion must be exercised for the purpose for which it was granted, and in accordance with fiduciary principles."
Role of the Employer
The role of an employer which had the task of considering ill-health early retirement pensions was considered in case E00156, which was summarised (at p28) in the Digest of Cases 1996/97 as follows:
"The complainant's doctor notified the employer of the complainant's wish to be considered for ill-health retirement and that he felt able to support such an application. Details were sent to the principal employer's medical adviser who, following examination, recommended medical retirement.
The plan defined ill-health as including
It defined incapacity as including:
The provisions for retirement on account of incapacity were not made subject to the principal employer's agreement. The employer notified the complainant that his request had been rejected. A further application was refused on the grounds that the principal employer did not consider his condition constituted incapacity as defined in the Trust Deed. One of the factors considered was evidence of attempts by the complainant to seek alternative employment with the employer on a continuing basis. The complainant notified the principal employer that he had been granted incapacity benefit by the DSS. The principal employer reviewed the original decision and granted early retirement on grounds of incapacity. The complainant received a cheque in respect of that part of his pension which could be commuted, and details of the annual pension. He did not receive payment of this pension until February 1996 when he was paid for the period 1 August 1994 to 31 January 1996. No interest was included. He alleged maladministration by the principal employer and the trustee.
Result:
The power of decision reserved to the principal employer as to whether or not an employee was suffering from ill- health or incapacity as defined in the rules must be exercised in good faith, and disregarding irrelevant factors. In the light of the medical evidence it would have been appropriate for the principal employer to accept the incapacity. In refusing the application undue weight was given to his attempt to secure further employment. The medical evidence showed he satisfied the definition of incapacity in the rules. The fact that he was subsequently granted ill-health retirement, and that the award was backdated to the date of termination of service, indicated the principal employer accepted the original decision was not one which should reasonably have been reached. But the complaint against the trustee was not upheld as the power of decision on this issue rested solely with the principal employer, which should pay interest on the tax free lump sum and the instalments of pension."
The Ombudsman applied a standard of "good faith" which is not necessarily the same as a fiduciary duty. This is in line with . It is interesting to note that the employer appears to have changed its decision and actually granted the ill-health pension on learning that the member had been granted incapacity benefit by the DSS. This was also held in case E00420 (see above) to be an important factor which the trustees should have considered.
The precise role of employers and trustees in handling ill-health pension applications obviously depends on scheme rules, but the Ombudsman's approach highlights the need for procedures to be laid down and properly followed and for the whole process to be handled in a careful manner. See also the article 'Ill-health cases - common practical problems and related case law'
