[2007] UKSSCSC CAF_4200_2005 (02 February 2007) 
CAF/4200/2005

DECISION OF THE PENSIONS APPEAL COMMISSIONER
  
1.	This appeal is unsuccessful.  I set aside the decision of the Newport Pensions Appeal Tribunal dated 26 May 2005 but I substitute a decision to the same effect as the tribunal’s.  Disablement pension awarded to the claimant from 9 October 2001, and any further disablement pension or disablement gratuity due to him in respect of a period before 9 October 2007, is to be withheld until the sum of £7,660 paid to him by way of gratuities in respect of disablement from 9 October 2001 has been recovered, but only to the extent necessary to recover that sum.  

REASONS

2.	The material facts of this case are straightforward and not in dispute.  The claimant served as gunner in the Royal Artillery from 1958 to 1961.  In or about 2001, he claimed disablement benefit under the Naval, Military and Air Forces Etc. (Disablement and Death) Service Pensions Order 1983 (SI 1983/883, “the 1983 Service Pensions Order”, now replaced by the Naval, Military and Air Forces Etc. (Disablement and Death) Service Pensions Order 2006 (SI 2006/606), “the 2006 Service Pensions Order”) in respect of bilateral noise-induced sensorineural hearing loss, a duodenal ulcer and a depressive disorder.  The first condition was accepted as attributable to service, the second condition was accepted as aggravated by service but the third condition was determined to be neither attributable to, nor aggravated by, service.  On 29 April 2002, the claimant was notified of a 1-5% assessment from 9 October 2001 for life (final) in respect of the first condition, a 6-14% assessment from 9 October 2001 for life (final) in respect of the duodenal ulcer and the rejection of his claim in respect of the third condition.  No award was made in respect of the first condition (because disablement in respect of such hearing loss may be taken into account only if the assessment of disablement is at least 20% - see article 9(2B) of the 1983 Service Pensions Order) but a gratuity of £4,304 was paid in respect of the second condition.  The claimant appealed in respect of the assessments in respect of the first two conditions and the disallowance of the claim in respect of the third condition.  On 23 July 2003, a tribunal upheld the assessment in respect of the first condition, varied the assessment in the second condition by making it an interim assessment for the period only from 9 October 2001 to 22 October 2005 and allowed the appeal in respect of the third condition on the ground that the depressive disorder had been aggravated by service.  On 6 September 2003, the claimant was notified of a combined interim assessment of 15-19% in respect of the duodenal ulcer and the depressive disorder and he was paid £3,356, being the £7,660 payable in respect of such an assessment where the estimated duration of the disablement within the range 15-19% was indeterminate, less the £4,304 already paid.  The claimant appealed again and, on 21 July 2004, the appeal was allowed to the extent that the assessment was increased to 20% in respect of the period from 9 October 2001 to 20 July 2006.  This has been taken by the Veterans Agency to be another interim assessment, presumably because section 5(1) of the Pensions Appeal Tribunals Act 1943 has the effect that a tribunal is not entitled to replace an interim assessment with a final one, although quite why a tribunal should be fettered in that way I am not sure.

3.	A 20% assessment attracts a pension instead of a gratuity.  However, on 30 July 2004, the Veterans Agency notified the claimant’s wife, who was acting on his behalf, that, because gratuities had already been received in respect of the same period, weekly payments would not start until approximately 15 August 2007 although the precise date would depend on the amount of future increases in the rate at which pensions are paid.  She protested and, not being satisfied with a letter of explanation dated 9 September 2004, lodged an appeal on behalf of the claimant, in which she complained about both the amount of the assessment and the decision not to make any payments until the amount of the gratuities had been recovered.  The Secretary of State resisted the appeal and it was dismissed on 26 May 2005.  The claimant now appeals against the tribunal’s decision with my leave.  The parties have both asked me to decide this appeal without an oral hearing.  

4.	Neither the Secretary of State in his response to the appeal to the tribunal nor the tribunal said anything about the claimant’s challenge to the level of the assessment.  It would, I think, have been good practice to do so, even though all that could have been said was that the tribunal could not consider the challenge because the decision of the tribunal sitting on 21 July 2004 had been final in respect of the assessment for the period up to 20 July 2006.

5.	The Secretary of State did, however, answer the challenge to the decision not to pay the pension until 2007.  He relied upon Article 55 of the 1983 Service Pensions Order, which provided –

“(1)	Where the Secretary of State is satisfied that compensation has been … paid to … a person to … whom a pension or gratuity may be paid …, the Secretary of State may take the compensation into account against the pension or gratuity in such manner and to such extent as he may think fit and may withhold or reduce the pension or gratuity accordingly.
(2)	…
(3)	In this article ‘compensation’ means –
(a)	any … lump sum payment in respect of the disablement … of any person, or in respect of any injury, disease or incapacity sustained or suffered by any person, being a payment –
(i)	for which provision is made by … Order in Council (including this Order) …”

6.	It was explained that –

“The Secretary of State’s policy is that where assessment of a person’s disablement increases to 20% or more within 6 years of a gratuity being paid, then the gratuity (or part of it) must be taken as advance payment of pension when calculating pension commencement dates.  This prevents payment being made twice for the same disablement for the same period.”

7.	In dismissing the claimant’s appeal, the tribunal said that it “found that it was reasonable of the Secretary of State to use his discretion as he did”.  The chairman’s grounds for refusing leave to appeal are longer than the tribunal’s grounds for dismissing the appeal.  He referred to the Secretary of State’s policy and said –

“Such policy has no legal effect, though it is useful in understanding how decisions are made.  Article 55 is discretionary, and the only issue is whether such discretion was exercised reasonably.  The tribunal took the view that it was.”

8.	The Secretary of State, in the first of two helpful written submissions by Mr Steven Kovats of counsel, instructed by the Treasury Solicitor, concedes that the tribunal’s decision is erroneous in point of law on the ground upon which I granted leave to appeal, which is that the tribunal erroneously confined itself to asking whether the Secretary of State had acted reasonably.  Proceedings before a tribunal are in the form of an appeal (not limited to a point of law) rather than a review and so the tribunal had to substitute its own judgment for that of the Secretary of State (although its decision might have been to the same effect) rather than merely reviewing the reasonableness of the Secretary of State’s judgment (which might have involved accepting that the Secretary of State’s approach was reasonable even though it would itself have taken a different approach).  The distinction is important and, although it is possible that the tribunal did in fact agree with the Secretary of State’s approach, the language used in the decision leaves open the possibility that it merely reviewed its reasonableness.  I therefore find the tribunal’s decision to be erroneous in point of law.

9.	Both parties have asked me to substitute my own decision for that of the tribunal and I consider it appropriate to do so.  However, the parties are not agreed as to what the decision should be.

10.	In his grounds of appeal, the claimant has argued that he was not given any warning that a deduction might be taken from his pension if he accepted the disablement gratuities, that the Secretary of State had fettered his discretion with his policy, and that the tribunal’s decision was unreasonable because the claimant was in a difficult financial position with limited means.  He argues that his pension should not have been withheld.

11.	The Secretary of State, however, maintains his original position and argues that withholding the pension is necessary to avoid double compensation out of public funds.  He points out that the claimant is not being required to repay money but merely to treat the gratuities as an advance payment of the pension and that his policy had been published in the Veterans Agency leaflet WPA 1 from April 2002 (a copy of which was produced, contradicting a concession made to the tribunal that such advice had not been published until October 2003).  He accepts that exceptional cases could justify departing from the normal policy and also that it would be possible to set the gratuities against the pension at a lower rate over a longer period so that a proportion of the pension was paid from when it was first awarded.  However, he submits that there are no exceptional circumstances here, because there is no evidence that the claimant suffered any disadvantage by, in effect, receiving the pension in advance and he also submits that recovering that payment over a longer period would not be desirable because it would be detrimental to the public purse, would place funds at risk (because, if the claimant died, the balance outstanding would be greater and would not be recoverable) and the amount of the set off would be arbitrary.

12.	In response, the claimant argues that it remains uncertain whether the policy was published in April 2002, when the assessment leading to the first gratuity was made, and that in any event the claimant was unaware of it.  He also challenges the basis of the “six year rule”, which he submits is arbitrary.

13.	Although article 55 of the 1983 Service Pensions Order and its successor, article 52 of the 2006 Service Pensions Order, are expressed in discretionary terms, the discretion must be exercised in a way that furthers the purpose of the legislation and is rational rather than arbitrary.  The Secretary of State is entitled to have a policy that indicates how he will approach the exercise of discretion, provided that the policy does not fetter his exercise of the discretion so that he cannot exercise it properly.  Indeed, it is desirable that he should have a published policy so that it can be seen that his decision-making is not arbitrary.  While, on an appeal, a tribunal is not bound by the policy, it must exercise the discretion conferred by the legislation judicially which, again, means exercising it in a way that furthers the purpose of the legislation and is rational and, moreover, it should have regard to the Secretary of State’s policy and explain any departure from it.

14.	The purpose of article 55 of the 1983 Service Pensions Order and, now, article 52 of the 2006 Service Pensions Order is plainly to prevent the duplication of payments and I find it very difficult to see how it cannot be right always to treat a gratuity as having been paid on account of a pension subsequently awarded in respect of the same period.  I also agree with the Secretary of State that it will generally be important to withhold any payment of pension so as to recover the amount of the gratuity as quickly as possible, but I find it less difficult to conceive of exceptions to that general rule.  Ex-servicemen and ex-servicewomen are scattered across the globe and it is possible to imagine a person living in a country without a developed social security system who has reasonably spent a gratuity before suffering some personal disaster leaving him or her destitute.  It might be reasonable in such circumstances to pay a portion of the pension, even though the effect would mean that the gratuity would be recovered only over a longer period with the increased risk of the pensioner dying while still in credit.  However, there is nothing before me to suggest that the whole of the pension should not be withheld in the present case until the gratuities have been set off in full.

15.	I am quite prepared to accept that the claimant in the present was not aware of the fact that the gratuities he had received would be treated as payments on account of any pension to which he might become entitled as a result of a successful appeal.  However, in my judgement, that is irrelevant.  There is no evidence that the claimant would have acted any differently had he been aware of that fact or that he has suffered any loss by acting as he did.  Moreover, in the absence of any express assertion on behalf of the Secretary of State to the effect that the gratuities would not be treated as a payment on account of a pension, I do not consider that the claimant was entitled to assume that the scheme contained the obvious lacuna there would have been in the absence of article 55.

16.	Although I have not asked the Secretary of State to comment on the Appellant’s challenge to the “six year rule”, the reason for the rule seems obvious.  It arises out of the relationship between the amount of a gratuity and the rate at which a pension is paid.  The largest gratuity is just less than six times the annual rate of the smallest pension.

17.	Insofar as his general approach to article 55 is concerned, I therefore accept Mr Kovats’ submissions.  Where an award of a disablement gratuity is replaced wholly or in part by an award of disablement pension, the gratuity should generally, to the extent to which it has been replaced, be treated as a payment on account of the pension and payment of the pension should be withheld accordingly.  

18.	However, there are some parts of Mr Kovats’ submissions about which I am rather less certain.  I agree with the Secretary of State that payment should not be “made twice for the same disablement for the same period” (my emphasis), but a disablement gratuity under the Service Pensions Orders is not awarded for a specified period and that can give rise to difficulties.

19.	Table 1 of Part III of Schedule 1 to each of the Service Pensions Orders provides for the amounts of gratuities for certain “minor injuries”, which are all the loss of all or part of fingers or toes and therefore permanent.  That does not give rise to any great difficulty.  By contrast, Table 2 is extraordinarily vague.  It provides for gratuities for disablement within the ranges of 1-15 per cent., 6-14 per cent. and 15-19 per cent, depending on whether the expected duration of the disablement is “temporary less than a year”, “temporary more than a year” or “indeterminate”.  There are therefore nine amounts at which gratuities may be awarded in accordance with that table.  The amounts paid in respect of disablement that is “temporary more than a year” are about twice those paid in respect of disablement that is “temporary less than a year”.  The amounts paid in respect of “indeterminate” disablement are about three times those awarded for disablement that is “temporary more than a year”.  Mr Kovats tells me that the Secretary of State considers that it is appropriate to estimate the expected duration of disablement to be “temporary less than a year” or “temporary more than a year” only where he is confident that the disablement will cease to exist entirely after less than one year in the first case and after more than one but less than two years in the second case.  If he considers there will be further disablement, the disablement is described as “indeterminate”.  

20.	Insofar as the Secretary of State takes the view that a finding that a particular degree of disablement is “temporary more than a year” is appropriate only if it refers to a period of not more than two years, I agree with his approach because it is consistent with the relationship between the amounts of gratuities.  

21.	I am less sure about the Secretary of State’s submission that “disablement within the degree referred to” should be considered “temporary less than a year” or “temporary more than a year” only if no disablement at all is expected after the end of one year or two years, respectively.  Whether that is right or not depends on whether “temporary” refers just to “disablement” or to “disablement within the degree referred to”.  The point does not require determination on this appeal but one consequence of the Secretary of State’s approach is that he apparently considers it to be inappropriate to award a gratuity on any basis other than “indeterminate” disablement where there is an interim assessment, however short the period of the assessment.  Given that an “indeterminate” gratuity must be taken to have been paid in respect of at least six years, this obviously gives rise to complications because interim assessments will almost invariably be for periods of less than six years.  The contrast with the position under the industrial injuries scheme is striking, particularly as that scheme, first introduced by the National Insurance (Industrial Injuries) Act 1946, was heavily influenced by the war pensions scheme.  Under the industrial injuries scheme, as it existed before gratuities were abolished, the amount of a gratuity was calculated by reference both to the extent of disablement and the period of assessment, with considerably more precision than is the case under the Service Pensions Orders (see, latterly, regulation 14 of the Social Security (General Benefit) Regulations 1982 (S.I. 1982/1408)).  Where there was an interim assessment of disablement of less than 20%, the amount of the gratuity would reflect exactly the period of the interim assessment and a series of interim assessments would result in a succession of small gratuities until eventually a final assessment was made.  Consequently, where a pension was subsequently awarded in respect of a period covered by one or more gratuities, the amount to be set off was clear.  Moreover, an assessment of disablement always resulted in a payment so that the relationship between assessment decisions and payment decisions was easily understood by claimants.  

22.	In any event, what was particularly concerning me when I issued a direction and asked a number of questions following the parties’ initial submissions was that the decision in this case had been expressed in a way that assumed that the award of disablement pension based on an assessment of disablement of 20% would continue after the end of the interim assessment.  I asked what would happen if disablement were to be assessed at less than 20% from 21 July 2006.  (No further assessment had in fact been made when I received the last submission in this case and I have not been told that one has been made since.)  Mr Kovats says that no further gratuities would be payable to the claimant “as his existing gratuities were both calculated on the indeterminate basis”.  I do not consider that that analysis can be correct because the award of the pension, albeit that payment has been withheld, replaced the award of the gratuities and so the “existing gratuities” which Mr Kovats suggests would prevent the award of a further gratuity do not in fact exist.  In my judgment, the correct approach if disablement is assessed at less than 20% is that a gratuity should be calculated as though the original gratuities had never been awarded but there should then generally be withheld under article 52 of the 2006 Service Pensions Order an amount equal to such amount of the original gratuities as has not already been set off against the award of pension.  The final result should be that the claimant will be in the same position as he would have been in had he not had to appeal to get disablement assessed at the appropriate level in respect of the interim period.  That, I suggest, is what the effect of article 52 should generally be.

23.	In the present case, therefore, I am satisfied that the gratuities amounting to £7,660 paid to the claimant should be recovered by withholding the disablement pension awarded to him from 9 October 2001.  If he continues to be entitled to a pension from 21 July 2006, the pension should continue to be withheld until the whole of the gratuities has been recovered (which, I presume, will now be rather earlier than 17 August 2007 because the rate at which disablement pension is paid has been increased since 2004).  Similarly, if he becomes entitled to a gratuity in respect of disablement from 21 July 2006, an appropriate amount of that gratuity should be withheld so that the whole of the original gratuities is recovered.

24.	Finally, I record that I asked what article 11(2) of the 1983 Service Pension Order meant and in what circumstances it might be applied.  Mr Kovats has provided me with a long explanation as to how it operated, which I shall file for future reference.  He added, however, that article 7(2) of the 2006 Service Pensions Order is intended to replace article 11(2) of the 1983 Order but “is unhappily worded.  …  Although the point does not arise in the present case, it may be necessary to read article 7(2) as reproducing the effect of article 11(2) of the 1983 SPO in order to avoid absurdity.”  Article 11(2) was expressed in such vague and opaque terms that it is not surprising that the draftsman of article 7(2) thought he or she was making an improvement when introducing some minor changes of language.  However, it does appear that he or she may only have succeeded in producing a paragraph that, read literally, makes no practical sense at all.  No doubt consideration will be given to introducing an amendment to article 7(2) before a Commissioner is obliged to construe it.  Consideration might also be given to the question whether a greater degree of precision and clarity could and should be achieved more generally in the legislation as it relates to the payment of gratuities, particularly in respect of interim decisions.

(signed on the original)	
MARK ROWLAND
Commissioner
2 February 2007