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When can employee benefits be classed as a pension?

The facts

In Mr E v BT (13 January 2017) PO-8170, Mr E was dismissed from British Telecommunications (BT) on grounds of capability because of his mental health problems. Mr E took BT to the employment tribunal (ET) for unfair dismissal, disability discrimination and unlawful deduction from wages. Mr E and BT ultimately signed a settlement agreement in respect of his claims (other than pensions).

At BT, when an employee is dismissed on grounds of ill health, they are eligible for BT’s discretionary ill-health benefits (benefits), which comprise a lump sum calculated on the basis of time served. This is payable into their group personal pension (GPP). Because the benefits are only payable where certain ill-health requirements are met, and vary according to the level of ill health, applications are assessed by BT’s occupational health and safety provider (OHS).

The OHS rejected Mr E’s application for benefits on the grounds that he had not tried all other alternative mental health treatments, which meant his condition might not be permanent (one of the requirements for payment).

Mr E claimed that the OHS’s decision was unreasonable and, after exhausting the internal appeal processes, complained to the Pensions Ombudsman, in spite of the settlement agreement and the fact that, at first glance, the benefits were a separate entitlement to his membership of the GPP.

If this is a Pensions Ombudsman case, where’s the ‘pension’?

Mr E argued that the benefits were a pension for the purposes of the relevant legislation and therefore fell outside the settlement agreement.

BT disagreed and challenged the Ombudsman’s jurisdiction. It believed the benefits were discretionary employment benefits, not a pension scheme, and therefore fell within the remit of the settlement agreement, which had closed off all non-pension claims against BT.

The Ombudsman held that the benefits were an ‘occupational pension scheme’ under UK pensions law. This provides, on the face of it, that benefits set out in an agreement in respect of people on termination of service (as well as on reaching a particular age, or on retirement) are a pension.

Given that:

  • Mr E’s employment was terminated, and
  • There was a written mechanism for his employer to pay benefits to him in respect of that termination

This was therefore a pensions complaint and so within the exception from the settlement agreement. The Ombudsman then found in favour of Mr E on the basis that the OHS had not identified the alternative treatments that could be effective, which is a big ‘no-no’ in Pensions Ombudsman cases.

What does this mean for employers?

This decision broadens the scope of complaints that the Ombudsman can deal with. There are many schemes and arrangements that are written down and provide benefits to employees on the termination of their employment. If these can all be classed as pension schemes, and so cannot be included in a settlement agreement, then there is potentially a very broad scope for claims. The cost considerations that limit such claims in other forums do not apply to the Ombudsman.

Notably it’s a free service and very rarely awards costs even for hopeless cases.

Employers should be mindful of this when drafting settlement agreements where such benefits on termination may apply and may wish to consider whether any of their other benefits could fall into the Ombudsman’s remit.   


James Borshell is a senior associate in the employment and pensions team at Dentons

Added: 06-03-2017

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