Pensions World

The Green decision on payment of ill health pension could cause headaches for trustees explains Gareth Soanes, Allen & Overy

Reaching a decision on whether or not to pay an ill health pension can be a tricky and sensitive process. Competing issues are often finely balanced and the only certainty is that the outcome will have an immediate and significant impact on the member.

For pension scheme trustees, therefore, devising a robust process for handling ill health applications is key. Getting the process right remains one of the most difficult aspects of pension scheme trusteeship and, as such, ill health pensions is a fertile area for complaints.

You might think that a scheme which confers the power on the employer – rather than the trustees – to determine whether or not a member qualifies for an ill health pension would be easier to operate. But that is not necessarily the case: some trustee boards in that position struggle to understand what their role is. 

Trustee role

“Incapacity” or “ill health” is a fact based test, set out in the rules of a pension scheme, which requires someone to decide whether or not the applicant meets the test. In many schemes, the decision on ill health rests with the trustees alone. Where that is the case, the employer’s role is limited to helping collate the relevant information. The decision clearly sits with the trustees and the employer plays no part in the decision making process.

But what of those schemes which provide for the employer to determine whether or not a member meets the test? Is it the case that the trustees have no role to play? That, clearly, is not right. Regardless of who is required under the rules to apply the ill health test, trustees have an underlying responsibility to satisfy themselves that the scheme’s rules have been properly followed. Failure to check this leaves them open to challenge before the Pensions Ombudsman. That was borne out in a recent determination (Green 78914/2). 

The legal position

In the absence of any requirement in the scheme rules to determine whether or not someone is ill, what is the legal basis of the trustees’ obligation and role? If trustees can be criticised for not applying critical consideration to the employer’s process, in determining ill health cases, how far does that duty extend? Should they review the employer’s medical evidence (or even commission their own report) with a view to reaching their own decision for example? Or should they simply ask the employer to confirm that it has followed a proper process?

The Green determination has thrown these issues back under the spotlight. 

Facts of the case

As a member of the New Airways Pension Scheme (NAPS), Ms Green was entitled to an ill health pension if her employment was terminated on the grounds of “medical incapacity” by her employer and if the principal employer notified the trustees accordingly. So, under the rules, the assessment of her condition fell entirely to the employer.

In considering whether someone satisfies the test of medical incapacity under the NAPS rules for an ill health pension to be granted, the employer must conclude that the condition prevents the member from “carrying out appropriate alternative employment where this is offered by a Participating Employer”. 

“Appropriate alternative employment” is further defined in the rules as “employment which, in the opinion of the Principle [sic] Company is suitable and reasonable employment taking the Member’s skill and current salary level into account”.

Ms Green saw her application for an ill health pension turned down at both stages of the scheme’s internal dispute resolution procedure. Before the Deputy Pensions Ombudsman, however, her application was sent back to the employer for reconsideration and Ms Green was awarded compensation from both the employer and the trustees. The key rationale which the Ombudsman applied was that the alternative job the employer offered was not considered by the employer or the trustees in terms of its appropriateness.

Addressing the trustees’ role, the Ombudsman was “not satisfied that the Trustees have assessed if appropriate procedures in accordance with the Scheme rules have been followed”.

Had the rule been applied properly?

The only trustee involvement under the rules was to be notified that the employer had reached a conclusion that the definition had been satisfied. What, then, is the basis of the obligation, which the NAPS trustees failed to satisfy, to assess whether appropriate procedures had been followed?

The principal function of a pension scheme trustee is to administer the scheme in accordance with its governing documents (normally the trust deed and rules). In cases like Green, where the trustees play no role in the actual decision making process, that means making sure that, in reaching its decision, the employer applied the rules correctly.

Alternative employment offer

Ms Green, who worked as cabin staff before her illness, was offered alternative employment: a ground based role at London Heathrow which would involve a commute from her home near Liverpool. The key issue at stake was whether or not that role was “appropriate” – the requirement under the rules. It is clear from the determination that the Deputy Pensions Ombudsman’s view was that the employer could not be satisfied that the test had been met.

While similar arrangements work for some cabin crew employees, who fly to work using standby tickets, the employer should have taken advice on whether or not the commute would render the new role inappropriate, even if adjustments were made. 

The Deputy Pensions Ombudsman went on to criticise the trustees for not doing more to satisfy themselves that the employer’s offer represented appropriate alternative employment. Failing to do so meant that they had not performed their role of checking that the rules were applied properly. 

There is a distinction here which is fairly narrow, but which goes to the heart of the issue: the trustees’ were not expected to satisfy themselves that the alternative employment offered was appropriate, rather they should have satisfied themselves that the employer had satisfied itself that it was appropriate. 

In practice, that means that the trustees should have expected the employer to take advice on the appropriate “alternative employment” and considered whether any travel to the job on offer was a relevant factor. But if the employer had done so, it would not then be for the trustees to seek to influence or change the conclusion even if it is different to one that they think they would reach. That said, if the employer’s conclusion appeared obviously to be perverse then the trustees should investigate to assess how the conclusion was reached. 

Practical application

It is clear that trustees are not expected to repeat the full process where a decision falls to be made by the employer. 

However, it is important for them to demonstrate that they have satisfied themselves that the scheme has been administered in accordance with the relevant rules (see Box).