The High Court has ruled that a scheme administrator is liable for negligent misstatement, after it told members who had a protected pension age that they would receive a tax-free retirement lump sum at a time when it knew it was going to re-employ them, and should have known that re-employment would trigger tax charges.
The facts of Corsham and others v Police and Crime Commissioner for Essex and others and Hazell and another v The Chief Constable of Avon and Somerset Police and others are unusual. However, the judgment confirms some important points that are relevant for all schemes.
What is a 'protected pension age'?
On 6 April 2010, the 'normal minimal pension age' under the Finance Act 2004 increased from age 50 to 55. The 'normal minimum pension age' is important because, if pension benefits are paid before it, they will be unauthorised payments which will usually trigger tax charges for the member and the scheme.
There are some exceptions to the rule that benefits cannot be taken before age 55. For example, members can retire before age 55 if they meet an 'ill health condition'. Members can also retire before age 55 if they have a 'protected pension age'.
The idea of the protected pension age is that members who had a right to retire at a younger age (for example, age 50) before the increase of the minimum pension age to 55 was announced, can still exercise that right. However, a number of conditions and restrictions apply. These include restrictions on re-employment after taking benefits. If the conditions and relevant restrictions are not complied with, then any retirement lump sum and all pension instalments paid before age 55 will be unauthorised payments which will usually trigger tax charges for the member and the scheme.
What happened in this case?
The appellants were all police officers who had a right to retire after 30 years of service. At different times in 2010 and 2011, they retired from service as police officers before the age of 55 and took their pension benefits. Shortly after retiring, they were re-employed in civilian roles which retained and made use of their valuable experience.
The two police authorities (which have since been replaced by the relevant Police and Crime Commissioners) were responsible for administering the relevant police pension scheme. They were also the bodies that re-employed the appellants in a civilian role after their retirement.
In practice, both police authorities had delegated administration to the pensions services departments of local county councils. Before the police officers retired, the administrators sent them information about their projected pension benefits. The letters confirmed that a retirement lump sum of up to 25% of the value of their pension could be paid tax-free, but that anything in excess of this would be an unauthorised payment and subject to tax charges. They also gave details of the tax charges that would apply. However, they did not say anything about the protected pension age or the potential tax consequences of re-employment.
The police officers' re-employment did not comply with the protected pension age restrictions. Faced with tax charges, they complained to the Pensions Ombudsman and then appealed to the High Court.
What did the High Court decide and why?
The judge ruled that:
- The police authorities, in their capacity as scheme administrators, should have known about the restrictions on re-employing people with protected pension ages.
- At the time that it sent the officers information about the tax treatment of their projected retirement lump sum, one of the police authorities knew that it had offered to re-employ those officers within a month of their retirement.
- As such, when the police authority wrote to the officers about the tax treatment of their projected retirement lump sums, it "ought to have appreciated that the payments of those lump sums (and the annual payments until the age of 55) would be unauthorised payments under the 2004 Act". This was not just because the unauthorised payment would expose the member to tax charges, but also because it would expose the scheme to tax charges.
- When it sent out letters setting out the tax treatment of retirement lump sums, that police authority assumed a responsibility "not to make statements which they should have understood were highly misleading and which did foreseeably mislead".
- Including a statement, in those letters, that the retirement lump sum would be tax-free if it was within the 25% limit, was a negligent misstatement because the police authority knew that the officers would be re-employed within a month and should have known that this would result in tax charges.
- The relationship between the police authority and appellants was such that it was "fair, just and reasonable" to impose liability for that negligent misstatement.
- It was reasonable for the officers to rely on the statements about tax included in the letters, they did rely on them and, if they had been provided with the correct information, they would have agreed a date for re-employment that complied with the relevant restriction.
- The other authority will also be liable if, at the time it sent its officers the letters setting out the tax treatment of the retirement lump sum, it knew that it had offered to re-employ them in a civilian role within a month of their retirement.
- The position might (but would not necessarily) have been different if the police authorities had only known that there was "a possibility" that the officers would be re-employed.
In contrast, the two Chief Constables were not liable. There was no complaint that they had assumed any duty to advise. Looking beyond this, in Scally v Southern Health Board, the House of Lords (now the Supreme Court) had "implied a term into the contract of employment requiring the employer to take reasonable steps to inform the employee of a valuable [pension] right conferred by the contract of employment of which the employee could not be expected otherwise to be aware". The Chief Constables did have a relationship with the appellants "closely analogous to that of employer and employee" whilst they were police officers. However, there was no contract of employment. As such, the court had to consider whether there was a similar duty outside of contract.
The judge concluded that, even if it was possible to decide that there was an alternative duty, the duty would not apply in this case. This was not a case where the appellants had not been aware of a pension right, and to hold the Chief Constables liable for not warning of the tax consequences of taking benefits would have been a "major and unjustified extension of the decision in Scally".
Osborne Clarke comment
The facts of this case are quite unusual, because the police authorities were wearing two hats. On the one hand, they were the scheme managers / administrators and on the other, they were the body that was going to re-employ the retiring officers.
The decision does, however, highlight the risk of 'assuming' a duty to advise by making (in this case) certain statements about the tax treatment of benefits but not taking account of all of the information you have and/or including suitable warnings. Trustees and administrators need to understand the tax protections that are relevant to the members of their scheme. They also need to take care when drafting retirement and other communications and to make sure that these include suitable warnings and disclaimers.
The decision also confirms the limited scope of an employer's duties in relation to pensions, provided that it does not 'assume' a duty to advise.