Mark Kowalik looks at the problems arising from ill-health pensions in the context of recent cases
Claims for ill-health pensions form one of the most contentious areas for pension scheme trustees and sponsoring employers alike. Where the benefit is calculated on the basis of enhanced pensionable service to normal retirement date, the additional costs to the scheme can often reach six figure sums. While the cost will ultimately be borne by the employer it may also reduce a scheme surplus, so it is of concern to both trustees and employers that such benefits are only paid to those who meet the specified criteria.
The Pensions Ombudsman offers an easy method for members whose applications are turned down to progress their grievances. While this may not be a comfortable thought for trustees, it does at least produce some general guidance. Ill-health disputes accounted for some 7% of the Ombudsman’s determinations in 1997.
However, it is still difficult to draw firm conclusions on how ill-health cases should be treated, as most cases turn upon the wording of the rules of the relevant pension scheme, in particular on the degree of ill-health required and how long it must last.
Unable to work - what does it mean?
A key question when interpreting ill-health rules is whether the member must be unable to perform only his own job or any job at all. This was considered recently in Derby Daily Telegraph v The Pensions Ombudsman.
The scheme rules stated that a member retiring with company consent on the grounds of “serious ill-health” was entitled to an immediate pension provided that if the member recovered sufficiently to be able (in the opinion of the trustees) to earn any income, the trustees could vary or suspend the pension. The question of whether a member had retired on the grounds of ill-health was stated in the rules to be a matter of fact upon which the employer “shall be the sole judge.”
The employer received medical advice that the chances of the claimant returning to the pressures of a full-time reporting job were minimal, but that she might well be able to undertake a less demanding role in the future. The employer rejected her application for an ill-health pension on the basis of medical evidence that she might be able to work in the future in some capacity.
Rimer J upheld the Ombudsman’s determination that the employer had used the wrong test. Although Rimer J accepted that the employer had applied “an unstrained interpretation to [the rule’s] fairly ordinary language”, he thought it led to “somewhat improbable and impractical consequences” which he found it difficult to accept had been intended. It would be relatively easy for an employer to determine whether or not an employee was still up to his current job or a similar one. However, if the employer had to decide whether an employee could earn any income at all, he concluded that that would involve an enquiry which was potentially more difficult and impractical as it would require an investigation into the employee’s talents, skills and abilities and whether they were capable of being turned to income earning advantage.
The conclusion to be drawn from this case (and the earlier decision of Harris v Lord Shuttleworth) is that if the test is to be the claimant’s inability to carry out any work at all, this must be very clearly specified in the rules. While the judge may have taken the view that determining total incapacity is a difficult exercise, it is one which surely can be undertaken by trustees or employers in practice. Indeed, rules providing different benefits for “total” or “partial” incapacity are not uncommon.
Permanent incapacity
Another question that often arises is how long the member’s incapacity or ill health should be likely to last to qualify as “permanent” incapacity. In Harris v Lord Shuttleworth, Glidewell LJ held that for incapacity to be permanent, the member must be able to show that the incapacity is likely to last until normal retirement date. This need only be shown on the balance of probabilities, but any case where the problem is of a more temporary nature will not normally qualify. This is the generally accepted rule.
However, in the recent case of West Yorkshire Fire and Civil Defence Authority ex parte Lockwood, the court held that a “permanent injury” test was satisfied if the member was disabled for the “foreseeable future”. This may mean something less onerous than up to normal retirement age. However, the court does not appear to have considered Harris v Lord Shuttleworth and the case may well be restricted to its facts.
When should the decision be made?
The question of when the permanence of the incapacity should be determined was recently considered in Key v Courtaulds Textiles plc. The company’s medical adviser concluded that he could not write off the applicant’s future employment prospects, but noted that the condition could develop to such a degree that the member would find it very difficult to return to work. Some nine months later the same doctor concluded that she was unlikely to return to work in the foreseeable future. Her employer terminated her employment on grounds of ill health on the basis of this advice, after she had been absent from work for almost a year.
Under the rules, she was entitled to an immediate ill-health pension if she retired “owing, in the employer’s opinion, to permanent incapacity in mind or body”.
The Vice-Chancellor upheld the Ombudsman’s determination that the employer had sufficient evidence on which to conclude there was no permanent incapacity. The Ombudsman had concluded that
“for an ill-health pension to be granted by the employer, [the medical practitioner] had to decide at the time of her dismissal whether the complainant was permanently incapacitated and inform the employer accordingly. From the information before him, including the report from the neurologist, the [medical practitioner] decided that the complainant was not at that time permanently incapacitated, and [there was] no evidence to suggest that that decision was perverse. Once the decision had been made, any subsequent medical evidence submitted was of no relevance. The complainant was dismissed on ill-health grounds, but not on the grounds that she was permanently incapacitated”.
While it is difficult not to feel some sympathy for the applicant in this case, at least it is now clear that it is the position at the time of leaving pensionable service that is critical.
Retirement, resignation or dismissal - does it matter?
Derby Daily Telegraph v The Pensions Ombudsman may seem particularly harsh on the employer as the applicant actually gave notice to the company that she was terminating her employment while on sick leave. Both the court and the Ombudsman obviously felt that the employer had an argument that her claim should fail because she had resigned and did not retire with the consent of the company on ill-health grounds. However, the fact that the employer had offered a “conciliatory gesture” in deciding to investigate the facts of her case seems to have left them with a liability they might otherwise have escaped.
On the other side of the coin, if an employee has been dismissed, the question also arises whether they are entitled to an ill-health benefit. As a point of law (although a point which must be very difficult for an employee to accept), an employee can be dismissed on grounds of ill-health without being entitled to an ill-health pension (as seen in Key v Courtaulds Textiles plc). Indeed, it used to be assumed that an employee who had been dismissed could not claim such a pension.
However, in Harris v Lord Shuttleworth, the court held that an employee who had been dismissed could still claim an ill-health pension, as the key issue was whether they had left service as a result of incapacity. In addition, in Key v Courtaulds Textiles plc, although this question was not specifically considered, the judge assumed that the member would have had a right to an ill-health pension provided she was “permanently incapacitated”. These cases must be right as it would be unfortunate if the qualification for an ill-health pension became a race between the employer serving notice of dismissal and the member applying for ill-health early retirement.
Evidence
Another area of difficulty is the need to obtain expert evidence and medical reports. Trustees and employers should ensure that any medical practitioners consulted understand the requirements of the scheme rules, and medical reports should relate back to the rules. The Pensions Ombudsman appointed his own medical adviser in a recent case because trustees had failed to instruct a medical expert in accordance with an earlier determination setting out the correct interpretation of the rule in question.
It is also important that no prejudicial remarks are included in instructions to medical experts or private investigators. A scheme that included in its instructions remarks that the purpose of the report was to show that an applicant did not qualify for an incapacity pension was criticised by the Pensions Ombudsman. Similarly, in a case where an employer instructed a private investigator to look for proof that a member was not as ill as he claimed, the Ombudsman considered that the investigator was biased from the outset, although on appeal, the High Court did say there was no legal reason why court surveillance could not be used in this type of case.
What does it all mean?
Ill-health early retirement claims are a difficult area. In particular, both trustees and employers must ensure that they fully understand the rules of their scheme and have procedures in place to ensure that they are acting in compliance with them.
