UK: Pension Overpayments And The Saga Of 'David v Goliath'

Last Updated: 12 July 2013
Article by Justin McGilloway

Pension overpayments and mistakes in calculating members' benefits happen. This is a fact of life. No administrative system is fool proof in preventing such errors and in dealing with such cases, the normal basis, applied by the Courts is that individuals are only entitled to their correct benefits. Therefore in the majority of cases, mistakes are rectified and overpayments recouped from the recipient.

Keeping the overpayment?

However, if because of the mistake or overpayment, the recipient has 'changed their position', redress should be considered to make good the loss. The term 'change of position' means that because of the error irreversible decisions or expenditure have been entered into, which now means the recipient is worse off. Change of position is not just limited to specific items of expenditure but can include improving one's lifestyle. The 'change of position' argument or for that matter asserting 'estoppel' (a legal principle that bars a party from denying or alleging a certain fact owing to that party's previous conduct) are notoriously difficult to establish. In addition, they tend to succeed only where the overpayment has been irretrievably spent, which in turn, rather perversely, penalises the more prudent individuals.

Pensions Ombudsman complaint - McNicholas

 In 2010, Natalie McNicholas had £311,500 paid into her pension scheme with Legal & General when she received a share of her husband's retirement savings as part of their divorce settlement. In addition, Mrs McNicholas received 70% of net assets under a consent order which also stated that one of their children had disabilities and might require support throughout his life.

In January 2011, Scottish Widows, the insurance company that ran Mr McNicholas' pension, contacted Mrs McNicholas and said that it had incorrectly calculated Mr Nicholas' pension and there had therefore been an overpayment of £97,626. Lawyers representing Scottish Widows then wrote to Mrs McNicholas in November 2011 to seek recovery of the overpayment claiming that it had been paid by mistake and had unjustly enriched her. They said that if she did not repay the money, court proceedings would be commenced against her and Legal & General.

At the end of November 2011, Mrs McNicholas instructed Wedlake Bell's Pensions & Employee Benefits Team to advise her. The obvious first step was to take action that would prevent this case going through the Court system which would mean legal fees and the inevitable stress of fighting an organisation much better resourced than a newly divorced mother of three! To this end, Wedlake Bell advised Mrs McNicholas to submit a complaint to the Pensions Ombudsman effectively taking the matter out of the Court's jurisdiction until the Ombudsman reaches his determination. As part of this initial process, Scottish Widows also agreed to contribute £2000 to her legal costs.

In her complaint to the Ombudsman, Mrs McNicholas complained that she should not have to repay the £97,626 overpayment as it was not due to any error on her part. The mistake was Scottish Widows' and had been caused by its 'maladministration'. The settlement she agreed with her former husband was driven by her current and future needs, and in particular the needs of one of their children. She had no reason to think that the sums quoted by Scottish Widows were wrong and had relied on the information when negotiating the divorce settlement with her former husband. Wedlake Bell's Family team also advised that the consent order and financial terms of her divorce could not be revisited.  The fact that the pension funds had already been allocated to provide professional care for their disabled child after her death also meant that a 'change of position' argument was fairly strong.

Determination – May 2013

The Ombudsman found in favour of Mrs McNicholas stating that: "There is no doubt that the overpayment arose through maladministration by Scottish Widows. Had maladministration not occurred, Mrs McNicholas would have known the true value of the pension and would have been able to negotiate either a larger share of her husband's correct pension or a more favourable division of other assets".

The Ombudsman also considered the elements of estoppel concluding that Mrs McNicholas had irrevocably altered her legal position in reliance of the representation made, to her detriment, losing the chance to pursue other financial relief. The financial settlement was agreed on the basis that it provided Mrs McNicholas with a fair share of the matrimonial assets and appropriate provision for the future. If she were required to repay the money she would be under-resourced for her own and her family's future needs.

The Ombudsman also held that Scottish Widows' original quote also amounted to negligent misstatement. Scottish Widows owed a duty of care to both Mrs McNicholas and her husband as it knew the purpose for which the information was given and that both would rely on it. It breached this duty of care by failing to provide the correct information. Mrs McNicholas acted on this to her detriment and it was reasonably foreseeable that she would do so.

The Ombudsman also said that the overpayment arose through Scottish Widow's maladministration, for which she could be entitled to compensation. However, to require her to repay, and then direct Scottish Widows to pay compensation, would be an unnecessarily cumbersome way to resolve matters. He ordered the insurer not to take any steps to recover the overpayment from Mrs McNicholas and to pay her £250 "in respect of the distress and anxiety caused".


  • The Ombudsman has seen clearly that the error was Scottish Widows. The 'change of position' argument was put to good use but the distinguishing feature of this case from other overpayment cases was that the money was inextricably woven into divorce settlement calculations. In this particular case, the divorce settlement could not be revisited and both sides had every reason to assume the information given by Scottish Widows and the money paid over were accurately calculated;
  • The other point to note in this case was the usefulness of the Pensions Ombudsman as a dispute resolution forum. This case was never suitable for protracted and expensive litigation. In fact, Scottish Widows could have made its own complaint to the Ombudsman. The threat of legal proceedings may have been a tactic to force Mrs McNicholas into paying over the money but in this instance it was wholly unnecessary one that unfortunately caused great distress and inconvenience; and 
  • It's concerning to think that many people in Mrs McNicholas' position simply buckle to the pressure of threatened Court proceedings. Preliminary legal advice (without breaking the bank!) can often be a sensible investment. It allows individuals to properly assess the merits of a case and avoid situations where individuals effectively bow to the pressure created by the threat of Court proceedings. More often than not, litigation is wholly unnecessary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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