Pensions Ombudsman: Ms E PO-22369 – Ombudsman overturns SSAS trustees’ decision on death benefit distribution

The Pensions Ombudsman has upheld a complaint brought by a beneficiary who argued that the trustees had failed to make a proper decision when distributing her late brother's death benefits.

The late member had been a member of a small, self-administered scheme (SSAS) which was established by himself, a close friend (Mr Allen) and his friend's wife (the Member Trustees). The professional trustee and administrator of the SSAS was Whitehall Group. 

On set-up in 2015, the SSAS expression of wish form detailed the member’s nominated beneficiaries as his sister (Ms E, the complainant) and Mr Allen, one of the Member Trustees, who were each to receive 50 per cent. 

However, the member completed a new nomination form in 2017 shortly before his death nominating benefits to be applied £25,000 to his estate and the remainder (over £250,000) to his sister. 

Following the member's death in 2017, there had been a delay in distributing his death benefits. The Member Trustees contested the 2017 change of beneficiaries on the basis that the member lacked capacity. The dispute carried on until they approached the second anniversary of the member's death. Conscious of the possibility of tax charges arising, in November 2019 the Member Trustees followed neither the 2015 nor the 2017 nomination and instructed the Whitehall Group to pay £25,000 to the member’s estate, £161,000 to Ms E and the remaining £112,000 to Mr Allen.

Determination

The Ombudsman was highly critical of the role played by all of the trustees and concluded that their decision was a perverse one, which no reasonable decision maker could have made. Emphasising the increased onus on professional trustees, the determination is a clear reminder of the roles and expectations of decision makers when determining death benefits and the Ombudsman noted the following failures by the trustees.

Breach of Edge criteria

Having ruled out the 2017 nomination, the Member Trustees made a decision that reflected neither the 2015 nor the 2017 nomination. The factors they took into account were the two-year tax deadline, the SSAS’ liquid funds at the time and their lack of medical evidence of the member’s capacity. Following Edge, the Ombudsman ruled that these factors were irrelevant and should not have been taken into account.

Incorrect presumption as to member capacity

The British Medical Association guidance provides that there is a presumption of capacity, with a heavy hurdle to displace that a person has a right to distribute their assets how they wish when they are about to die. The Ombudsman requested medical records and found that while the member had struggled to communicate verbally at times, there was no evidence that his capacity to make decisions was impaired when he signed the 2017 nomination. The conclusion therefore should have been that he did have capacity.

Failure to manage conflicts

Whitehall shouldered a great deal of the responsibility as at no stage did they tell the Member Trustees that they needed legal advice on their conflicted position. There was a “clear and serious conflict of interest”, as Mr Allen stood to gain £112,000, and his wife was also conflicted as she too had a clear interest in this. Whitehall were in breach of section 249A of the Pensions Act 2004 in that they had no system in place under their internal controls to identify and manage conflicts of interest. Both Whitehall and the Member Trustees were in breach of this requirement and the decision should have been delegated to an independent person. They were also in breach of their duty to act in the best financial interests of the SSAS’ beneficiaries, with Whitehall having a higher standard of care as a professional trustee.

Exoneration and indemnity not available

None of the trustees could rely on the exoneration and indemnity provisions in the SSAS rules or the potential relief available under section 61 of the Trustee Act 1925.

The Ombudsman found that Whitehall could not rely on the exoneration under the scheme rules as he found that they had acted in bad faith, as they made an explicit decision to remain impartial in the dispute so as to avoid conflict with either party. The designation of £112,000 to Mr Allen without seeking any legal advice was a breach of their core duty of care to act in the best financial interests of the beneficiaries. Whitehall was “recklessly indifferent” to Ms E’s interests as a beneficiary. The Member Trustees also acted in bad faith as they were knowingly potentially conflicted and decided to pay £112,000 to Mr Allen using the two-year tax rule as justification. They were also unable to rely on the exoneration clause under the rules, as their honesty was called into question.

The trustees could not rely on the indemnity provisions and the breaches of trust were attributable to each and all of them.

The Member Trustees were afforded no relief under s61 Trustee Act 1925 as they failed to act honestly in their handling of conflicts of interest and failed to allocate the death benefits in accordance with the scheme rules.

Outcome

The Ombudsman concluded that it would not be appropriate to remit the decision to the trustees. Instead, he found that the death benefits should be distributed in line with the 2017 nomination, which he considered was valid. He also directed the trustees to reimburse the complainant for any income tax charge she may incur as a result of the death benefit payments and further ordered the Member Trustees and the Professional Trustees to pay the complainant £1,000 and £2,000 respectively for the severe distress and inconvenience caused.

Read the determination (Ms E (PO-22369) (6 December 2022)).