Guaranteed Annuity Rates: When must members be informed?

The Pensions Ombudsman has recently published two decisions which highlight some potential issues arising when scheme administrators fail to inform members that they benefit from a guaranteed annuity rate (GAR). The decisions related to the administration of the Paine Webber (UK) Pension Plan, a DC scheme that offered a GAR on retirement if the annuity was bought by Abbey Life Assurance Company Limited, the provider of the scheme.

25 November 2015

The Pensions Ombudsman has recently published two decisions which highlight some potential issues arising when scheme administrators fail to inform members that they benefit from a guaranteed annuity rate (GAR). The decisions related to the administration of the Paine Webber (UK) Pension Plan, a DC scheme that offered a GAR on retirement if the annuity was bought by Abbey Life Assurance Company Limited, the provider of the scheme.

Godfrey: failure to provide pre-retirement GAR illustration
In this case, the PO found that the failure of a pension provider to follow its usual pre-retirement procedures, including providing the member with a pension illustration which took account of a GAR, was maladministration. As Mrs Godfrey had not been provided with her GAR on retirement, she decided to take out an annuity on the open market, which resulted in a lower income.

Mrs Godfrey had joined the Paine Webber (UK) Pension Plan in 1978. At the time, the Plan’s governing documentation provided that any pension purchased under the open market option could not be less than the pension provided under the policy. This provision was not included in subsequent versions of the rules, including those in force when Towers Watson became Plan administrator in 1990. Neither benefits statements issued by Abbey Life nor those issued by Towers Watson contained an express reference to Mrs Godfrey’s GAR. 

When Towers Watson issued Mrs Godfrey with a pre-retirement statement six months prior to her retirement, it gave her the choice of three annuities. None of these was an annuity provided by Abbey Life, because without a GAR, the rate was too low. Mrs Godfrey then opted for Canada Life on the basis of the information provided to her by Towers Watson.

The PO upheld the complaint against both Abbey Life and Towers Watson. He found that Abbey Life should have provided a pre-retirement option letter and retirement illustration for Mrs Godfrey, as that was its usual practice. He further found that Towers Watson had failed to make proper enquiries of Abbey Life regarding the benefits held by the Trustee for Mrs Godfrey’s benefit, particularly as there had been some questions raised about the applicability of a GAR. Abbey Life was therefore ordered to pay to Mrs Godfrey the additional amount she should have accrued, with interest, and set up an annuity to top-up her benefits going forward. Both Abbey Life and Towers Watson also had to pay an additional £750 each to Mrs Godfrey for the inconvenience caused to her.

Sayer: no duty on provider or administrator to inform member of GAR before transfer
In another case brought against Abbey Life and Towers Watson in relation to GARs, the PO found that neither had a legal duty to volunteer information about the GAR when a member transferred out of the scheme. 

Mr Sayer was part of the same plan as Mrs Godfrey, joining in 1984 and becoming a deferred member in 1987. In the 1990s, Towers Watson corresponded with Mr Sayer regarding the possibility of transferring his accrued benefits on the basis that he might exceed HMRC maximum limits (then in force). Mr Sayer transferred his benefits to Winterthur Life (UK) Ltd in 2002, having taken independent advice. It was brought to Mr Sayer’s attention in 2010 that he would have been entitled to a GAR in relation to the plan, but he had not been informed of this at the time of transfer. He therefore complained to the PO.

The PO dismissed the complaint on the basis that neither Abbey Life nor Towers Watson had been advising Mr Sayer on his transfer, and there was no evidence that Mr Sayer or his IFA had asked either of them whether there was a GAR in relation to the policy. The PO determined that there was no statutory duty to disclose this information in the absence of a request, nor would it be fair, just, and reasonable to impose a liability on Abbey Life or Towers Watson. He also stated that in the context of HMRC limits in force in 2002 Mr Sayer had "clearly a good reason for […] transfer", and concluded that even had Mr Sayer known about the GAR, he would have made the transfer anyway.

What effect will these decisions have?
Where schemes contain a GAR, including as part of an AVC arrangement, these cases highlight the extent to which this should be brought to members’ attention. They serve as a reminder that customary practices should not be diverged from without good reason. In the current financial climate, it is much less likely that a member would have a good reason for transferring out of a scheme with a GAR, and so in spite of the finding in Sayer it would be safest to keep members informed about their entitlement. 

It is worth noting that in neither Sayer nor Godfrey was a complaint brought against the trustee of the plan. In both cases, the trustee assisted the claimants in bringing their claim to the PO. The scope, if any, of trustees’ duties to advise members about benefits options has always been uncertain, and it seems that the outcome of any complaint brought against the trustees of the scheme would depend on the applicable facts.