Jessica List: Discretion – damned if you do, damned if you don’t?

Administering death benefits can be challenging when opposing beneficiaries can accuse an administrator of using too much discretion or not enough, writes Jessica List. The only way to avoid such a situation, she suggests, is by urging individuals in more unusual cases to keep records of why they have made a particular nomination

Death benefits hit the headlines again last year, with two high-profile cases demonstrating what can happen when things go wrong.

In one case, Mr K made an expression of wishes in 2011 in favour of his partner at the time. After his death in 2017, Mr K’s father complained about the administrator’s decision to pay benefits to the now ex-partner, stating that his son had clearly forgotten to update the expression of wishes. He confirmed that Mr K and the ex-partner were only together for a short time; Mr K had had other partners since and the ex-partner had not even stayed close enough to Mr K to attend his funeral. The Pensions Ombudsman instructed the administrator to identify all potential beneficiaries and make a new decision, ignoring the fact that the funds have already been paid to the ex-partner.

In another case, Mr M was a member of a small self-administered scheme (SSAS) along with his brother and (then) sister-in-law. Mr M signed an expression of wishes form back in 2004 when the SSAS was set up, with his brother named as the beneficiary. In 2013 Mr M made a will leaving “everything” to his three daughters. It was not clear whether or not Mr M meant this to include the death benefits from the SSAS.

When Mr M died, the administrator decided to follow the expression of wishes. His daughters complained about this decision, arguing that Mr M did think that the SSAS was included when he updated his will in 2013. They also questioned the validity of the expression of wishes form – although it had been signed by Mr M, it had actually been filled out by his brother, who had also amended the form to name himself as the beneficiary after initially listing his own wife’s details (presumably mistaking the form for his own).

Due to the peculiar circumstances, the Ombudsman went a step further in this case and ruled that the death benefits should be split evenly between Mr M’s brother and three daughters. The administrator must also cover the tax charges which will now arise as a result of the delay paying the death benefits.

Too much or too little?

A common theme of these cases is the belief that the administrator did not adequately exercise its discretion. The complainants believe the administrators should have given greater consideration to their assertions that the nominations were outdated and used that information to consider making a different decision.

Of course, there are clear cut cases where expressions of wishes are years out of date and the investor’s wishes had clearly changed; this is exactly the type of situation where the administrator’s discretion is best used. However, it also seems to me that there could be risks at the other end of the scale too. What if a potential beneficiary claims that the administrator has exercised too much discretion?

For example, what if Mr K had always intended the ex-partner to inherit 100% of his pension and had good reasons for that decision which he simply never documented? What if he had reconsidered it every year like clockwork and actively decided to leave the expression of wishes as it was? If the administrator had exercised discretion and paid to his father instead, they could have inadvertently paid out against Mr K’s wishes and potentially faced a complaint from the ex-partner instead.

Admittedly from the details given, it seems unlikely in that case. But there will be cases where any course of action will leave one or more party unhappy, and the administrator could be criticised equally for following an expression of wishes as for going against it.

So what is the solution? As always, the first step is to make sure the individual does have an expression of wishes in place and that it is kept up to date. In terms of problem solving, it’s the pension equivalent of turning it off and on again. But what about steps beyond that? In light of cases like these, it seems increasingly worthwhile for individuals in more unusual situations to keep records of why they have made a particular nomination, and also keep note of conversations they’ve had in relation to the expression of wishes, such as deciding to keep it the same despite a change in circumstances. Essentially, anything the administrator can use to justify a decision or resolve a dispute is helpful.

It’s probably fair to ask whether investors should need to go to such lengths to help ensure their wishes are met. However, as contested death benefits cases are always highly sensitive and make difficult situations far worse for all involved, it’s probably worth the extra effort.

Jessica List is pension technical manager at Curtis Banks Group