Universities Superannuation Scheme · CAS-53519-W5N0

CAS-53519-W5N0

Ombudsman’s Determination Applicant Mrs N

Scheme Universities Superannuation Scheme (the Scheme)

Respondent Universities Superannuation Scheme Ltd (the Trustee)

Complaint summary

Summary of the Ombudsman’s Determination and reasons

Detailed Determination Material facts

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1 Salary sacrifice is a mechanism recognised by HMRC, where an employee agrees to a reduction in their salary or bonus that is equal to their pension contribution and, in exchange, the employer agrees to pay the total pension contributions. See https://www.gov.uk/hmrc-internal-manuals/employment-income- manual/eim42750 2 CAS-53519-W5N0 On 2 July 2019, Mrs N complained to the Trustee. In summary, she said:-

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2 See https://www.legislation.gov.uk/ukpga/2008/30/contents

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On 4 March 2021, the administrator of the Scheme sent a letter to Mrs N which included details of her recorded contributions, together with the implied employer contributions. These were:-

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Mrs N was also advised that if she required a transfer value despite this being an option not available to her, there would be a charge of £352.50.

Summary of Mrs N’s position

The issue of not receiving any benefits from the Employer’s contributions had not been satisfactorily settled. In February 2019, she was informed that a decision was made to grant her a standard pension. But it was not clear whether this decision had been made as an exception to the Scheme Rules, or whether the relevant Rules had been revised.

She could not say with confidence that the Scheme Rules, which in her view were unfair and potentially unlawful, would not be applied in subsequent contributions made by the Employer.

Trustees had a fiduciary duty to act fairly and impartially towards Scheme members and to avoid conflicts of interest. In her view, the Trustee was in breach of this duty. It had no power to retain contributions within the Scheme, which would benefit longer serving members or the Trustee, at the expense of those with shorter membership, regardless of how modest the amounts were.

The Employer had paid the contributions only because Mrs N was employed by it. It was not for her to show a statutory right to those benefits, but for the Trustee to show exactly which legislation permitted it to deprive her of part of her employment benefit package.

It was likely that there had been numerous members with short-term employment who had been deprived of their pension benefits. If the Trustee was permitted to act in this way, the Scheme Rules would negate the incentive employees had of automatic enrolment, which required the employer to contribute to their pension.

Following the introduction of pension freedom legislation in 2015, it was possible to build up and retain pension benefits until age 75 on favourable tax terms. The Scheme Rules not only denied her the option to transfer out but forced her to start taking pension income regardless of her circumstances and wishes. The consequence was that, if she were to die one day after taking her benefits, the entire value of the remaining benefits would be lost, unless there was a surviving spouse or civil partner. Refusing to permit transfers denied older members the freedom to choose whether to take benefits at age 65 and whether to pass their pension pot to their chosen beneficiaries.

7 CAS-53519-W5N0 The Trustee had the option of revising the Scheme Rules, to enable transfers out at a greater age or to adopt a less discriminatory rule of allowing retention of the benefits within the Scheme. Benefits became payable at prescribed ages only because the current Scheme Rules required it. They could be revised so that it was mandatory, and not discretionary, to permit transfers out to members aged over 65.

Updated legislation required trustees to provide transfer values and did not prohibit them from allowing transfers out of a pension scheme. The Trustee had a duty to review the Scheme Rules from time to time and ought to do so following such fundamental changes to general pension rules.

The Equality Act (Age Exceptions for Pension Schemes) Order 2010 (the Equality Act Order)3 was enacted prior to the introduction of pension freedom legislation and did not compel pension trustees to discriminate.

If trustees chose to discriminate on specified criteria, they had to show that their actions were proportionate to achieve a legitimate aim. Saving of cost alone was not an objectively justified aim. The Trustee had not shown that permitting older members to transfer out of the Scheme would cause any undue administrative or cost burden, compared to younger members. In addition, transferring out would save the cost of administering those member’s pension payments in the future.

She requested that The Pensions Ombudsman (TPO) considered the Trustee’s initial refusal to provide a transfer value and, subsequently, its demand to charge Mrs N £352.50 to do so. This should be compared with providing transfer quotations to younger members free of charge once in any 12-month period, and then applying a charge of £235 for providing further quotations during that period.

The issue of Mrs N not receiving any benefits from the Employer’s contributions, as she did not meet the qualifying criteria, had been settled. She re-joined the Scheme and was subsequently provided with pension benefits. She had not suffered any sustained financial or other injustice.

Chapter IV of the Pension Schemes Act 1993 (PSA 1993)4, gave members the right to transfer their benefits if they left a pension scheme and applied to transfer at least one year prior to their NRA.

The Scheme Rules gave the Trustee discretion to allow deferred members to transfer their benefits out of the Scheme, over and above their statutory right. This right had to be exercised before age 64, being 12 months before the Scheme’s NRA. The Trustee’s policy was to extend this period and allow members to transfer out up to age 65.

3 See https://www.legislation.gov.uk/uksi/2010/2133/contents/made 4 See https://www.legislation.gov.uk/ukpga/1993/48/part/IV

8 CAS-53519-W5N0 The practice of allowing non-statutory or discretionary transfer values only up to age 65 may be deemed to be direct discrimination on the basis of age. But there were robust grounds to allow this practice by the Trustee, on the basis that it was objectively justified, and it was the subject of a statutory exemption.

Objective justification was established on the basis that the practice of providing transfer values beyond age 65 caused logistical, administrative, and cost related issues. In addition, all statutory transfer values were provided only up to 12 months prior to NRA, the reason presumably being that pension schemes must be permitted to administer benefits to come into payment at a prescribed time.

The Trustee extended the statutory limit, as it wanted to provide flexibility to the Scheme’s deferred members. However, it had a duty to bring benefits into payment and had to establish a framework to allow this discretion, without causing undue cost, uncertainty, and lack of predictability. To extend transfer rights too widely would change the fundamental nature of the Scheme, with the focus of the member’s benefit changing from being a guaranteed pension and lump sum to being a transfer value.

Any finding that the practice of allowing discretionary transfers after age 64 and up to a specified age was discriminatory and not objectively justifiable would mean that no trustee could permit the practice with any age limit attached. Essentially, it would mean discretionary transfers would be permitted after age 64. This could not be correct in the context of an occupational pension scheme, where benefits became payable at prescribed ages with administration procedures, preservation, and strict compliance.

The Equality Act Order5, Regulation 31, allowed the practice of applying an age limit for the transfer of the value of a member’s accrued rights out of a pension scheme.

The Trustee’s decision to allow transfers up to NRA, but not beyond, was reasonable and proportionate in all the circumstances.

There was objective justification and/or a statutory defence, allowing the continued practice of non-statutory/discretionary transfers up until age 65. There was no breach of trust or statutory duty regarding the issue of a refund of employer contributions made as part of a salary sacrifice arrangement.

Adjudicator’s Opinion

5 See https://www.legislation.gov.uk/uksi/2010/2133/schedule/1/paragraph/31/made

9 CAS-53519-W5N0 The Scheme Rules applicable to Mrs N’s complaint are the Universities Superannuation Scheme Rules dated 19 November 2015 (Scheme Rules 2015), which superseded all previous Rules.

Scheme Rules 2015, Rule 8 (see Appendix 1), stated that, if a member suspended active membership in the Scheme but resumed membership at a later date, then the suspended period would be treated as active membership. That rule did not say that the total period of active membership must be over two years of qualifying service.

Consequently, an active Scheme member was entitled to standard benefits at their NRA, regardless of whether their total membership was less than two years or more. The Adjudicator concluded that the Trustee had acted in accordance with the Scheme Rules 2015, by offering Mrs N benefits based on her standard salary, instead of employee contributions only.

While Mrs N was also concerned that other Scheme members with less than two years of qualifying service might be discriminated against, TPO could only address her complaint and the circumstances relating to her case. Scheme members who were also concerned about their Scheme benefits could raise their own complaints.

In 1993, PSA 1993, came into force. PSA 1993, Chapter IV, set out which members acquired a statutory right to a transfer value of their pension benefits. Relevant to Mrs N’s case, Chapter IV, section 93(1)(a)(I), stated that this right applied to members of occupational pension schemes whose pensionable service terminated on or after 1 January 1986 and at least one year before normal pension age (NPA).

In April 2015, the Pension Schemes Act 20156, came into force. It made a number of changes to the transfer rights of members of defined benefit occupational pension schemes. One of those changes was in PSA 1993, Chapter IV, which became PSA 1993, Part 4ZA, Chapter 1. Section 93 was also amended. Relevant to Mrs N’s complaint, Section 93(4) stated that a member must have one year or more before their scheme’s NPA, in order to have a statutory right to a transfer value.

In determining the Scheme’s NPA in respect of Mrs N, the Adjudicator noted that:-

6 See https://www.legislation.gov.uk/ukpga/2015/8/contents 7 See https://www.legislation.gov.uk/ukpga/1995/26/contents

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As Mrs N accrued Scheme benefits with less than one year from her NPA, the Adjudicator concluded that she did not have a statutory right to a transfer.

Even though the Trustee had discretion to allow members to transfer their Scheme benefits with less than 12 months before their NRA under the Scheme, the transfer had to take place before the member reached NRA. So, the Trustee had acted in accordance with the relevant Scheme Rules and legislation.

The Equality Act 2010, Section 3, stated that the practices, actions, or decisions by the trustees of a pension scheme which were listed in Schedule 1 were not in breach of the non-discrimination rules. One of those practices was described in the Equality Act 2010, Schedule 1, Section 31, as follows:

“The application of an age limit for transfer of the value of a member’s accrued rights into or out of a scheme, provided that any such age limit is not more than one year before the member’s normal pension age”.

As Section 31 stated that placing an age limit on the transfer of benefits was not discriminatory, provided that the limit was no more than 12 months from the member’s NPA, Mrs N had not been discriminated against by not being allowed to transfer her Scheme benefits after age 65.

The Trustee was under no obligation to provide Mrs N with a transfer valuation, as she did not have a statutory right to transfer her benefits out of the Scheme. The Trustee had taken a decision, requiring members with no statutory right to transfer their Scheme benefits, to pay a higher fee to obtain a cash equivalent transfer value (CETV) than those members who had a statutory right. This was due to the cost of using the service of the Scheme’s actuaries. Although Mrs N disagreed with that decision, the Trustee had not breached any Scheme Rules or Equality legislation by imposing such a condition. The higher charge was not determined by the age of the member but, rather, on whether or not the member had statutory rights within the Scheme.

Mrs N did not accept the Adjudicator’s Opinion and in response made some additional comments. Further comments were also provided by the Trustee.

11 CAS-53519-W5N0 Summary of Mrs N’s post Opinion comments

The issue regarding Scheme members with less than two years of qualifying service has not been settled. She has not been told whether the Trustee made an exception in her case. When the Trustee informed her that she would get the benefit of employer's contributions, she had not yet completed two years of qualifying service. In her view, re-joining the Scheme did not necessarily mean that she would complete two years of service. She suspected that the Trustee made an exception in her case. The Scheme Rules were in conflict with the Trustee’s fiduciary duty on this issue.

The Adjudicator interpreted the Scheme Rules 2015, Rule 8, to mean that, so long as a member resumed contributions, they were treated as having had the minimum two years’ qualifying service even when that was not the case. Mrs N cannot see how the Adjudicator can interpret this rule to add words or meaning which is not there. In her view, such an interpretation would bring about an absurd result. For example, if a member left after 23 months’ worth of contributions but did not resume membership, they would be denied the benefit. But someone leaving only after three months service and resuming two months later, immediately qualified for standard benefits because that resumption would be treated as completion of two years qualifying service.

The Adjudicator’s interpretation of the Scheme Rules does not reconcile with the short service definition in PSA 1993 either.

The Adjudicator has taken no account of the general rule of law, prohibiting trustees from benefiting from trust funds or acting in conflict with the beneficiary's interest. The Trustee is in conflict with the beneficiary's position. The Scheme Rules also lead to conflict between one group of beneficiaries (those with longer service) and those with less than two years of service. This is because those with longer service presumably also benefit from the general fund to which contributions made by the employer on behalf of those with shorter service are added.

While Mrs N understands that TPO can only address her specific circumstances, it is a legitimate question to consider the extent to which the Trustee is benefitting from the breach of its fiduciary duty. When it is clear that a large number of short-term employees are denied the benefit of employer’s contributions, it is important to scrutinise and highlight that breach.

Though not previously mentioned, it is obvious that favourable tax treatment is given to encourage employers to contribute, on behalf of employees. When considering the legitimacy of the Trustee’s actions and the Scheme Rules, it is reasonable to query whether such actions bring them in conflict with tax rules too.

Regarding the higher fee demanded by the Trustee in order to provide a CETV, the Trustee had initially refused to provide it to Mrs N. Then, in March 2021, the Trustee demanded a fee. Requiring older Scheme members to make this payment is discriminatory in Mrs N’s view. Whilst cost may be a consideration, it can only overcome the charge of age discrimination if accompanied by other substantive 12 CAS-53519-W5N0 justification to achieve some other legitimate aim. Mrs N had asked that appropriate case law be considered but the Trustee has not provided any supporting information to compare the cost of providing a CETV to people in her situation, as opposed to providing information for free and at a lesser charge to younger members. She cannot see any legitimate aim of discriminating between the age groups. In her view, cost cannot be a legitimate aim, as the Trustee would be incurring more costs in producing information routinely for younger members.

She believes that more consideration should be given to case law, in particular the decisions in the McCloud and Sargeant cases, requiring there to be proportionality and legitimacy of aim, not just to save cost, if age discrimination is to be lawful. Unless information is given on an approximate number of older people in situation similar to hers, who are requesting transfer values, and the cost difference in providing this information compared with doing so for younger members, this issue should be looked at in order to consider if the discrimination is legitimate.

Summary of the Trustee’s post Opinion comments

The Trustee agrees that it is not permitted to fetter its powers/discretions. However, the factors, enquiry, and consideration of any such powers/discretions will depend on 13 CAS-53519-W5N0 the nature of the power/discretion. A transfer value, for example, is set and the assumptions and methodology for its calculation are prescribed under a policy. This does not mean that because the Trustee follows that policy there is a fetter.

The discretion to permit a transfer outside of the statutory regime was introduced to allow the Trustee to have flexibility and members to have choice. However, there are consistent and pervading constraints on the orderly administration of members’ retirement journeys and payment of benefits which would apply to all members.

Under the Scheme Rules, the benefits of a deferred member come into payment on their “normal pension age”. This would mean that, in practice, there are no usual circumstances where a deferred member is considering or has the opportunity to transfer their benefits after NPA. So, it is not entirely correct to refer to a policy but more articulately a practice based on the Scheme Rules.

The practice and rules of providing an NPA from which benefits are payable is clearly permitted under the Equality Act 20108, and the Equality Act Order.

There can be a review of the merits of the decision taken in relation to Mrs N, however:-

8 See https://www.legislation.gov.uk/ukpga/2010/15/contents

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As Mrs N did not accept the Adjudicator’s Opinion, the complaint was passed to me to consider. I issued a preliminary decision (the Preliminary Decision) which did not uphold the complaint.

Mrs N made further submissions in response to the Preliminary Decision, which are summarised below, in paragraphs 90 to 94.

Summary of Mrs N’s response to the Preliminary Decision

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It followed that the lack of entitlement of older members to transfer out was the consequence of the Trustee’s rigid policy, and this lack of entitlement was used to justify the discriminatory higher charge for providing a transfer value.

When asked, Mrs N declined the opportunity to provide further detail in relation to her comment in paragraph 90 above.

Ombudsman’s decision

9 See https://www.legislation.gov.uk/ukpga/1993/48/part/X/enacted 10 See https://www.uss.co.uk/for-members/your-benefits-before-april-2016

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Directions

Anthony Arter CBE Deputy Pensions Ombudsman 31 May 2024

20 CAS-53519-W5N0 Appendix 1 Scheme Rules 2015, Rule 8

“8. CRB BENEFIT ACCRUAL

8.1 An active member shall accrue the prospective right on retirement at normal pension age to an accrued pension amount and an accrued lump sum amount.

8.2 For the purpose only of determining the extent of active membership, a period of suspended membership at the end of which the member resumes active membership is to be treated as if it had been a period of active membership and of service.”

21 CAS-53519-W5N0 Appendix 2 Extracts from Scheme Rules 2015, Rule 18

“18 Early leavers without qualifying service

18.1 Application of this Rule

This rule applies to a former member who does not have qualifying service on ceasing service.

18.2 Refund of contributions

Such a former member is entitled to a refund of:

18.2.1 that individual's contributions (excluding MPAVCs and that individual's contributions as referred to in sub-rule 18.2.3), subject to deduction of any tax and an amount in respect of any CEP, plus compound interest at such rate as the trustee company may determine;

18.2.2 an amount equal to the MPAVCs paid by that individual together with the investment return on those MPAVCs, subject to deduction of tax; and

18.2.3 an amount equal to that part of the member's DC account which is attributable to contributions paid by that individual, including the investment return on those contributions, subject to deduction of tax.

18.3 Pension and lump sum option

18.3.1 Notwithstanding sub-rule 18.2, a former member who does not have qualifying service on ceasing service (except an individual who gives notice in writing to their employer of retrospective withdrawal from the scheme in accordance with Rule 39.1) may elect, in lieu of a refund of contributions:

(a) if they left service prior to 1 April 2022, for the amount under sub-rule 18.2.1 to be applied without the deductions to provide a pension and lump sum for the former member at normal pension age (and corresponding payments on death for the former member’s spouse or civil partner, dependants and eligible children) of such amounts as the trustee company may determine, acting on actuarial advice;

[…] 22 CAS-53519-W5N0 18.3.2 Contributions made by an employer under sub-rule 41 (Salary Sacrifice) (other than matching contributions under sub-rules 5.3 and 6.3) in respect of a member who has become a former member to whom this rule applies shall be included in the amount to be applied to provide the benefits payable under sub-rule 18.3.1.”

23 CAS-53519-W5N0 Appendix 3 Extract from Scheme Rules 2015, Rule 12 (Late Retirement)

“12.1.3 Late retirement benefits

Where the prevailing normal pension age has been attained and service has continued thereafter, the member shall be entitled to receive, from the day after the date of retirement in respect of that individual's active membership, the accrued pension amount and the accrued lump sum amount, with that part of each of the accrued pension amount and the accrued lump sum amount which is attributable to pensionable service accrued or credited prior to that normal pension age increased by such amount as the trustee company may decide on actuarial advice.”

24 CAS-53519-W5N0 Appendix 4 Scheme Rules 2015, Rule 19 (Transfers Out)

“19.1 Statutory right

A member or former member has the right to request a transfer payment of that individual's accrued rights under the scheme, or of that individual's accrued rights under the scheme to flexible benefits or to benefits that are not flexible benefits, to a transfer arrangement in accordance with Part 4ZA of PSA 93.

19.2 Recipient of transfer payment

The trustee company may make a transfer payment only to the trustees or administrator of a transfer arrangement.

19.3 Non-statutory transfers

19.3.1 Money purchase AVC transfer

The trustee company may, if a member or former member so requests, make a transfer payment of that individual's member's MPAVC fund to a transfer arrangement.

19.3.2 Member’s DC account transfer

The trustee company may, if a member or former member so requests, make a transfer payment of that individual's member's DC account to a transfer arrangement.

19.3.3 DB rights transfer

The trustee company may, if a member, ex-spouse participant or former member so requests, and on such terms and conditions as the trustee company may require, make a transfer payment to a transfer arrangement of all of that individual's accrued rights under the scheme to benefits that are not flexible benefits in circumstances where that individual would not have the statutory right to apply for such a transfer because either or both of the conditions in section 93(4)(b) and/or section 95(1A) (b) of PSA 93 are not satisfied but where all other conditions in Part 4ZA of PSA 93 are satisfied.

19.4 Special reciprocal arrangements

Where the trustee company has entered into any special reciprocal arrangements under sub-rule 47.5 the amount transferred to another scheme that participates in those arrangements shall be calculated accordingly.

25 CAS-53519-W5N0 19.5 Non-statutory transfers

At the request of the relevant member, ex-spouse participant or former member the trustee company may, and subject to such conditions as it sees fit to impose, transfer all or part of a member, ex-spouse participant or former member’s accrued rights under the scheme to one or more transfer arrangements in circumstances other than in accordance with Part 4ZA of PSA 93. The amount of the transfer payment (or payments) shall be calculated using methods and assumptions decided by the trustee company, subject to any applicable legal requirements.

19.6 Discharge of liability

Following a transfer in accordance with this rule 19 (Transfers out) the trustee company and the scheme shall be discharged from all liability to which the transfer relates.”

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