The Pensions Ombudsman has ordered the trustees of the European Metal Recycling Scheme to pay around two decades of unpaid spouse’s pension arrears and interest, in a determination that underlines the importance of forfeiture clauses and robust member tracing and record-keeping processes.

The complaint concerned a widow’s pension that had been paid from 1996 following the death of Mrs P’s husband, but which unexpectedly ceased in 2001 after she moved to Turkey. Mrs P did not contact the scheme again before her death in 2020, and the scheme subsequently argued that the benefits had been forfeited under its rules because they had remained unclaimed for more than six years.

However, the Pensions Ombudsman rejected that argument, finding that the wording of the scheme’s forfeiture provision was ineffective and ordering the scheme to pay the outstanding arrears and interest to Mrs P’s estate.

Commenting in Mallowstreet, senior associate Richard Meers said one of the most significant aspects of the determination was the Ombudsman’s approach to whether Mrs P should be treated as a “missing beneficiary” or instead as someone who had suffered an underpayment of benefits.

The Ombudsman found that Mrs P should be treated as underpaid “on the basis that the spouse’s pension may have stopped because of a mistake on the part of the administrator or the then trustees in 2001, despite that being unclear, and the scheme had been funded on the basis that the spouse’s pension would be paid until death,” Richard noted.

He added that trustees need to properly consider the circumstances in which underpayments arise, particularly where there may have been administrative failings or uncertainty around why payments ceased in the first place.

The determination builds on the analysis in the 2021 Axminster Carpets decision, which established that forfeiture clauses must clearly and expressly operate to remove a member’s entitlement to benefits. In this case, the Ombudsman concluded that despite the relevant rule being headed “Lien on benefits and forfeiture”, the operative wording itself was insufficient to amount to an effective forfeiture provision.

Richard noted that the case serves as an important reminder for trustees to review both whether scheme rules appear to contain forfeiture provisions and whether the drafting is likely to withstand scrutiny.

The determination also raised questions around the adequacy of tracing efforts undertaken by the scheme. The administrator had apparently used an incorrect date of birth when attempting to trace Mrs P through the Department for Work and Pensions, with no response received despite her state pension continuing to be paid into a UK bank account until her death.

“Trustees need to take reasonable steps to trace missing beneficiaries, but what is reasonable depends on the circumstances,” Richard commented.

He further observed that the absence of clear historic documentation may have contributed significantly to the outcome.

“It was unclear why her pension had stopped then. This shows the importance of maintaining documentation and proper records,” he said. “If that had been done in this case, then a proper explanation for the cessation of the spouse’s pension may have transpired, which could have had a bearing on the case.”

The determination is a warning flag for the pensions industry, particularly given the number of schemes currently preparing for buyout and wind-up exercises, where historic data quality and unresolved benefit issues can come under increased scrutiny.

Richard also noted that while the determination could potentially be appealed, the commercial realities facing the scheme may weigh against further litigation.

“An appeal may not be worthwhile for the scheme,” he observed.

Read Richard’s comments in Mallowstreet, here.