Jessica List: Death benefit discretion problems revisited

Two years on from her previous article, Jessica List returns to the issues surrounding discretionary death benefits which are still causing headaches for administrators...

Two years ago I wrote here about a couple of high profile complaint cases which both centred on death benefits; or, more specifically, around each scheme administrator’s choice of beneficiaries.

In both cases, the complainants were unhappy with the fact that the administrator had chosen to pay in line with the deceased’s expression of wishes and not to exercise its discretion, despite the fact that there was evidence that circumstances had changed and the deceased’s actual intentions were unclear.

The complainants each felt that the administrator had followed the expression of wishes without question and failed to take important information into account.

I wrote at the time that the problem with discretion is that there could be risks either way; in any case, where there is a dispute between beneficiaries there is the potential for at least one party to be left unhappy regardless of the outcome. There are certainly examples coming from the opposite point of view.

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

For example

For example, let’s take the case of Mr D, who had made an expression of wishes in favour of his wife Mrs D. The couple separated in 2007 but did not divorce. In 2015 Mr D made a will which made provision for both Mrs D and his new partner, Miss Y. He did not update his expression of wishes.

After Mr D’s death in 2017, his solicitors argued that Miss Y should inherit his pension benefits; they believed this was Mr D’s intention. The administrator agreed and exercised its discretion to go against the expression of wishes and pay benefits to Miss Y instead.

A file note confirmed that the administrator had decided to pay to Miss Y as she fitted HM Revenue & Customs’s definition of a dependant and that the will indicated that Mr D intended her to benefit from the pension.

The note also confirmed that the administrator was going to disregard the expression of wishes on file as it was for Mr D’s former spouse. Mrs D complained about the decision.

It is worth a reminder at this point of when the Ombudsman can interfere with an administrator exercising its discretion in such cases.

The Ombudsman recognises the potential for parties to be left unhappy with an administrator’s decision without it meaning that the administrator has done anything wrong. Therefore it will only intervene if it believes the administrator has done one or more of the following:

  • Failed to take relevant factors into account, or has taken irrelevant factors into account
  • Asked itself the wrong questions in order to arrive at its decision
  • Misdirected itself on a point of law
  • Arrived at a ‘perverse’ decision – in other words, one which no reasonable decision-maker in possession of all relevant information could reach.

In Mrs D’s case, the Ombudsman found that the administrator didn’t have adequate information about the situation: it hadn’t allowed Mrs D to address claims about the situation made by Mr D’s solicitors, and did not seem to have investigated contradictory information: for example, Mrs D had claimed that she and Mr D were both still ‘committed to their mutual financial security’, whereas Mr D’s solicitors said the couple had made a ‘full and clear division of their property’.

The Ombudsman also found no evidence that the administrator had confirmed Miss Y’s claims of financial dependence on Mr D, or established that Mrs D was not also still a dependant herself – particularly as the administrator had on several occasions inaccurately referred to her as a ‘former’ or ‘ex’ spouse when they were in fact still married.

The Ombudsman directed the administrator to reconsider its decision, giving reasons for that decision and highlighting the evidence upon which it was based.

If you’ve ever wondered why a scheme administrator seems to be completing an in-depth investigation before paying death benefits, even in relatively straightforward cases, this is a clear example.

In schemes where the benefits are paid at the administrator’s discretion, this discretion is not only relevant in cases where there is a dispute between beneficiaries or where circumstances have clearly changed since the expression of wishes is made.

While expressions of wishes are most often followed, the benefits are being paid at the administrator’s discretion in every case, which means that the administrator has a responsibility to be aware of the deceased’s circumstances and consider all relevant information before making a final decision.

In cases where a party is left unhappy, the process can become longer and more painful for everyone involved if the administrator cannot fully explain its decision.

As ever, the best preventative measure against situations like these is for clients to make an expression of wishes and keep it as up to date as possible as their circumstances change.

Keeping records of why particular decisions have been made and making beneficiaries aware of such decisions can also help, especially where there is the potential for one or more parties to be uncomfortable with the decision.

Jessica List is pension technical manager at Curtis Banks