How to help clients repay when the clawback request comes

Some people may have enough saved in readily realisable assets, such as cash accounts, to enable them to make a repayment. 

Others may be lucky enough to have a scheme that will write off smaller adjustments - and they might not even be contacted about the issue in the first place.

As John Lawson, head of policy, retirement solutions, for Aviva, comments: "There is a strong argument that any overpayment should be met by the scheme administrator as it was their fault the records kept were wrong."

However, he says there are instances where the member should have known the benefits paid or transfer value were much higher than they should have expected.

Therefore, Mr Lawson explains: "In this case, the argument the administrator is responsible is weaker, as anyone should know whether the benefits they received were reasonably correct in relation to their salary and length of service." 

Advisers can certainly help to make sure that clients include any of their outgoings and only agree an affordable repayment schedule. Steve Webb

This is because benefits are usually calculated on a 1/60ths or 1/08ths basis. 

So what happens if the scheme does demand clawback from its retired members? And what if clients have already spent the money and it just is not there for repayment? How can advisers help clients or prospective clients who may be in this category?

Phil McGovern, managing director of MPA Financial Management, admits: "That's a tough one."

He says: "I would ensure the client always has an emergency fund of cash available for any unforeseen circumstances."

Fighting your corner

In some cases, it might be worth pushing back on the administrators, depending on the documentation and wording of any forms the client might have. This is because the administrators may be forced to concede their error and waive the clawback.

Mr McGovern gives an example of a transfer which was overpaid in the client's favour. 

"We had a client recently who transferred a defined benefit (DB) scheme a year ago and the trustees wrote to the ex-member and said they had done a calculation and realised they had overpaid the transfer value by £100,000 - and could they have it back.

"They tried bullying the client into handing it over, until they approached us and we advised the client to refuse to do so. They had signed a discharge form at that time which discharged the scheme from all liabilities to the member at the date of transfer, so that was the administrator's error, and they had to suffer the financial loss.

"Which they did."

Certainly none of the problem was the fault of the pensioners. That makes a reasonable case for arguing the overpayments should be absorbed by the scheme, not the individual. Ros Altmann

Baroness Ros Altmann, former pensions minister and chairwoman of fintech firm Pensionsync, commented: "If a client is in financial trouble and has not got the money to pay back, then they should appeal against the demand for repayment and claim they should be allowed not to pay it back."

Kay Ingram, director of public policy for LEBC, is in full agreement with this. "The member should challenge any request for repayment. 

"While trustees have a legal right to reclaim overpayment, they also owe members a duty of care and are required to check that payments are correct when they make them, and to carry out regular audits."

She suggests: 

• Members should ask for an explanation of how the mistake arose and whose fault it was.
• They should ask when it was discovered.
• If it was the scheme's error, and it has taken more than six years to notify the member of the mistake, the scheme may not have a legal right to claim a refund of the overpayment.

However, even if the scheme administrators agree to waive the clawback, the scheme could adjust future payments to the correct amount, so this is worth factoring into any ongoing financial advice. 

Arranging payment plans

Keeley Paddon, head of technical for the SimplyBiz Group, says it is worthwhile having a discussion with the scheme administrators over how payments can be made and when. 

She explains: “Where errors are being uncovered, we know that some schemes are being sympathetic. In addition though, the Ombudsman is also seeing cases now where individuals may have transferred out which complicates the matter even more. We would envisage that some form of staggered payment plan would be on the table.”

This would be particularly helpful for those pensioners who might be facing bills running into the thousands, although as Mr McGovern warns "HMRC are not so easy to deal with", as the taxman will look at your client's total income and, regardless of any personal financial conditions, will often state the money has to be repaid in total by a certain date. 

Sir Steve Webb, director of policy for Royal London, agrees. "If a scheme insists on asking for repayment of overpayments, they should at the least do so on an affordable basis. 

"They will often issue an expenditure form, which clients will need to complete, on the basis of which they will come up with a repayment schedule.

"Advisers can certainly help to make sure that clients include any of their outgoings and only agree an affordable repayment schedule." 

If not happy with the response, the decision should be referred to the scheme's dispute resolution process. Kay Ingram

Again, it would also be worth pushing the scheme to absorb any costs before agreeing to a payment plan.

Ms Altmann adds the fact the mistakes were made by schemes, or by HMRC, or by a combination of the two, so "certainly none of the problem was the fault of the pensioners".

"That makes a reasonable case for arguing the overpayments should be absorbed by the scheme, not the individual," she adds.

Weight of the regulator

Ms Paddon has already outlined the pension ombudsman's involvement in some cases where individuals contracted out and are left facing clawback despite having transferred out of the scheme. 

But even in less complicated circumstances, The Pensions Regulator (TPR) has already set out its own thinking on how schemes should go about asking for money back from pensioners. 

Ms Ingram states: "TPR requires schemes to give members a reasonable time to pay back any overpayment, or to agree an extended period of adjustment."

Where errors are being uncovered, we know that some schemes are being sympathetic. Keeley Paddon

This would be particularly beneficial where an immediate clawback would cause hardship to the individual. 

Therefore any schemes which seem to be overly demanding can be taken to task with the pensions ombudsman. Ms Ingram says if the member has not received a satisfactory resolution or proposal of a resolution from the scheme administrators, it is worth pursuing the matter further.

She adds: "If not happy with the response, the decision should be referred to the scheme's dispute resolution process. If still not satisfied, members may complain to the pensions ombudsman and have three years to file a complaint.

"The ombudsman has power to make a binding direction to the scheme."

This is especially where the expertise of a financial adviser comes into play, as an IFA can help the pensioner to ask all the right questions and frame the complaint to the scheme and the pensions ombudsman, as well as explain the complicated calculations between the pension provider and the state and check whether these were correct.

simoney.kyriakou@ft.com