Caring is sharing

Many cohabitants may not be aware that they are unlikely to have an automatic right to a pension benefit on their partner's death. Even married couples or civil partners need to carefully consider the provisions of their pension schemes to ensure that they are adequately protected should one of them die.

In 2007, the Law Commission produced a report examining the financial consequences of the termination of cohabiting relationships and recommending reform. However, these reforms were shelved in 2008 and the government announced that before taking any action it intended to wait and see the result of legal changes made to cohabitants' rights in Scotland (see 'Learning from experience', Solicitors Journal 153/31, 11 August 2009).

Most occupational pension schemes will provide for a pension (and often also a tax-free lump sum) to be paid to the widow, widower or surviving civil partner of a deceased member, although there is no requirement that they must do so. The rules of some schemes may allow the trustees to decline to pay the benefit in certain circumstances; for example, where the couple were separated at the time of death or where the marriage or civil partnership took place shortly before the death. The position is different for a legal spouse (including a civil partner) where the pension scheme is contracted out of the state second pension (the scheme booklet should make it clear if this is the case). Here, the surviving partner is entitled to a pension at a minimum prescribed level.

Financial dependance

In the case of a cohabitant, it is far less likely that the scheme rules will give an entitlement to a pension. There may be provision allowing for a discretionary dependant's pension to be paid. The rules will have a definition of 'dependant' which must be satisfied and HMRC requirements mean that broadly the scheme trustees would need to be satisfied that the surviving partner was financially dependent on, or mutually financially dependent on, the deceased.

In some cases, the rules may only allow this benefit to be paid if there is no legal spouse or surviving children. Some schemes do allow adult dependants' pensions to be paid as of right, usually where there is no legal spouse, where certain criteria are met (such as length of relationship and proof of cohabitation). An example of this is the Armed Forces Compensation Scheme, which came into force in April 2005, following a number of high-profile cases brought by the surviving partners of soldiers killed in service. It allows for benefits to be paid to partners who were 'cohabiting in a substantial and exclusive relationship' where there was financial dependence or interdependence at the date of death.

The position is similar for 'death in service' lump sum payments. Under most occupational pension schemes, lump sum death benefits are payable at the discretion of the trustees (for inheritance tax reasons). The terms of the discretionary trust will be set out in the relevant scheme rules. Trustees will often have discretion as to how much, if anything, should be paid to the relevant beneficiaries within the relevant class, with the maximum aggregate benefit typically being a multiple of the deceased's salary (often two or four times salary).

Legal principles for trustees

In reaching their decision in any particular case, the trustees of the scheme will need to follow some basic legal principles (as per Lee v Showman's Guild [1952] 2QB 329) concerning the exercise of discretionary powers:

• they must ask themselves the correct questions;
• they must direct themselves correctly at law and adopt a correct construction of the trust deed and rules (most importantly, who is within the class of beneficiaries to which a payment could be made?);
• they must take into account all relevant but no irrelevant factors; and
• they must not arrive at a perverse decision, i.e. a decision no reasonable body of trustees would arrive at.

If trustees follow the above basic principles in reaching a decision, it will be very difficult for the decision to be successfully challenged either by complaint to the pensions ombudsman or the courts. It is therefore very important that trustees follow proper procedures in considering how best to distribute the lump sum.

In making their investigations, the trustees will first need to examine the class of potential beneficiaries under the rules. A cohabitant may or may not fall within its scope '“ usually they would do. The trustees will usually need to ascertain all beneficiaries in existence under the class as set out in the rules. In one ombudsman determination, the trustees argued referring to case law that they need not consider all possible beneficiaries from 'China to Peru' (Ms M R Beau D'Aulnay [H00533]). The ombudsman said that the principle of not doing so was acceptable where there was a potentially large class of beneficiaries but, where there were only a small class in existence, the trustees should consider all potential beneficiaries.

The trustees will need to consider the financial circumstances of each potential beneficiary and the extent to which they had been supported by the deceased. They should also consider whether the deceased made other financial arrangements for that person, for example through a will or life insurance.

Nominating beneficiaries

There will usually be provision to allow the member to nominate beneficiaries to receive the lump sum on his death. The nomination provision can be drawn quite broadly allowing individuals and/or organisations such as charities to benefit and allowing the person nominating to specify the shares in which the beneficiaries are to take the benefit. The member will usually be at liberty to nominate the cohabitant as beneficiary if he/she so wishes and the rules allow.

The nomination form is a key document and, although it does not usually bind the trustees, they must give it serious consideration and weight. Some of the factors that the trustees will need to consider in examining the nomination form are:

• Is the form up to date? Many schemes write to members reminding them that they can update their forms if they wish. This is helpful to the trustees' decision making because, if reminders have been issued and no change made, then they may feel on firmer ground in deciding that it represents the member's true intentions.
• Have there been any changes in circumstances since the form was entered into? For example, marriage, divorce or a change in financial arrangements.
• How reasonable is the nomination? For example, has the deceased left everything to the cohabitant, leaving spouse and children potentially without financial support? If that were the case, the trustees might feel that it would be appropriate not to follow the nomination and split the lump sum more equitably, recognising other parties' moral and financial claims to the lump sum.

So, what happens if a cohabitant is named on the nomination form and, following the death of her partner, she does not receive the lump sum? The first stage would be to contact the scheme trustees and ask them to explain the reasons for their decision. Although there is no strict legal obligation for trustees to disclose reasons, the pensions ombudsman has in a number of cases found that it is good practice for trustees to record them and should disclose them on request to affected parties unless there was a good reason not to do so (for example, protecting confidential personal information).

If the cohabitant is not satisfied with the trustees' response, then the next stage would be to bring a complaint under the pension schemes' internal disputes resolution procedure and ask the trustees to consider the situation afresh. If he or she is not satisfied once that process is complete, then a complaint could be brought to the pensions ombudsman. Complainants can also contact The Pensions Advisory Service, an independent non-profit organisation, for advice and guidance.

Cohabitants are unlikely to have the same rights as legal spouses to pension benefits on the death of their partner. Any rights will depend on the rules of the individual pension scheme. It is relatively unusual for a pension to be payable as of right to a surviving cohabitant. A death in service lump sum is usually paid under discretionary trusts, and a cohabitant may well fall within the class of potential beneficiaries.

It is vital for cohabitants to carefully check what pension benefits, if any, will be available for their partner on their death and to ensure that any relevant nomination forms are kept up to date. If the pension scheme does not, or is not guaranteed to provide, adequate benefits then alternative financial provision should be considered.