[2007] UKSSCSC CP_3577_2006 (25 June 2007)

CP 3577 2006

DECISION OF THE SOCIAL SECURITY COMMISSIONER

1	I dismiss the appeal. For the reasons below, the decision of the tribunal is not wrong in law. 

2	The appellant and claimant (Mrs R) is appealing with permission of a tribunal chairman. Her appeal is against the decision of the Warrington appeal tribunal on 3 08 2006 under reference U 06 078 2006 00503.

REASONS 

The disputed decision
3	Mrs R’s husband, Mr R, was 65 on 10 03 1999. He claimed a pension, and was paid a state retirement pension from that week based on his own contributions.

4	Mrs R was 60 on 1 05 1999. She claimed a pension, and was paid a state retirement pension from that week based on her own contributions. At that time she was also entitled to claim a pension based on her husband’s contributions. But she gained nothing from that, and received only the pension based on her own contributions.
 
5	Mr R died on 26 09 2005. His weekly pension entitlement at that time was £94.55 a week. Mrs R’s weekly pension then was £105.11. 

6	As a result of Mr R’s death Mrs R’s pension was reduced to £94.18 a week. Mrs R asked the Pension Service to explain why. She was not persuaded by what she was told and appealed. She contented that she could not understand the logic, legality or justice of receiving less as a widow than she did as a married woman. She lost not only her husband and all that meant but also his pension. Why did she have to lose some of her own pension as well, when it was based on her own earnings and contributions?

7	Mrs R did not challenge her own or her husband’s entitlements as at the time of his death. There is no disputed issue about the national insurance contribution records of either of them, or about the guaranteed minimum pension (“GMP”) from either occupational pension. The dispute is confined entirely to the effect of her husband’s death on her own entitlement. 

The tribunal decision
8	The tribunal found that there were no facts in dispute. With some hesitation, it confirmed the decision of the Secretary of State reducing Mrs R’s pension after Mr R died. It commented that the rules were extremely complex and that they seemed from some perspectives to be unfair. The record shows that the tribunal undertook a thorough review of the submissions presented by the two parties. Mrs R argued that there should be a proportional adjustment to the inherited contracted out deductions to deal with the interaction between the maximum additional pension entitlement of a pensioner and the effect of double contracted out deductions. Although Mrs R argued this strongly and clearly in her written submissions the Pension Service did not make any submission on this issue and the tribunal could find no authority on it. The tribunal therefore granted permission to appeal. I must now consider Mrs R’s contentions.

The facts
9	The reason for the complexity in this appeal is in part because when Mr R died Mr and Mrs R were both receiving four kinds of pension. The fact that this is true of many pensioner couples does not remove or ease the complexity.

10	Both Mr R and Mrs R were receiving occupational pensions that were contracted out of the state pension system. There are two aspects to a contracted-out pension. During their working lives contributors pay lower weekly national insurance contributions to the state. After retirement they must offset the occupational pensions received against their entitlements to state additional pensions. The relevant law is discussed in detail in my decision R(P) 1/ 04. The amount that must be offset is the GMP (guaranteed minimum pension). It is also called the contracted-out deduction.  The GMP is calculated under the rules in the Pension Schemes Act 1993. The values of the GMPs for Mr R’s and Mrs R’s pensions are not in dispute.	 

11	Mr R’s entitlement in the week of his death derived from a state pension payable against his own contributions and from an occupational pension. His pension entitlement that week was as follows:

	Occupational pension: GMP						             £85.02

	Basic Category A (own contribution) retirement pension			£82.05

	Graduated retirement benefit (pre 1975 contributions)			  £7.15

	State additional pension (or earnings related pension)	
						Maximum     		 £90.37
						Less GMP       		 £85.02
						Payable			    	 £5.35

	Total state retirement pension payable					£94.55

12	Mrs R’s entitlement in the week of Mr R’s death derived from her own contributions and from an occupational pension. Her pension entitlement that week was as follows:

	Occupational pension: GMP							£95.99

	Basic Category A (own contribution) retirement pension			£80.41

	Graduated retirement benefit (pre 1975 contributions)			  £3.97

	State additional pension (or earnings related pension)	
						Maximum      		£116.72
						Less GMP        		  £95.99
						Payable			             £20.73

	Total state retirement pension payment					£105.11

As noted above, Mrs R’s pension could have been based on her husband’s contributions in that week, but were not. This is because she gained no advantage in her particular circumstances from basing her pension on his contributions.

13	None of these figures were disputed by Mrs R. 

14	According to the Pension Service, Mrs R’s entitlement in the week following Mr R’s death derived from her own and he late husband’s contributions and from her own occupational pension and her entitlement under the occupational pension of her late husband. Her pension entitlement that week was as follows:

	Occupational pension: GMP							£95.99
	Inherited GMP from late husband’s pension				             £42.51

	Basic Category A and B (own and husband’s contributions) 
		retirement pension							£82.05

	Graduated retirement benefit (pre 1975 contributions of 
		both self and husband)			  			 £7.55

	State additional pension (or earnings related pension)	
			Own maximum 			£116.72
			Maximum from husband	 	  £90.37
			Capped at maximum entitlement	£143.08		
						Less GMP (own)            £95.99
						Less GMP (widow)        £42.51	
						Payable			              £4.58

	Total state retirement pension payment				            £94.18

15	Those figures show that Mrs R both gained and lost as regards individual elements of her pension income when her husband died. The differences are as follows.

(1)	She gained a widow’s pension from her late husband’s occupational pension, which for these purposes (as measured by the GMP) was worth half his own pension. I do not have the full details, but this follows the standard approach of such schemes of providing a widow’s pension of half the pension of the late husband. Mr R’s pension was a contracted out occupational pension scheme. Put at its simplest, the GMP for a widow’s pension is normally half the GMP of the late husband. That is the figure here. 

(2)	She gained an increase in her basic state retirement pension from £80.41 to £82.05. She was receiving slightly less than the maximum weekly amount of basic pension from her own contributions. After Mr R died, she became entitled to the full basic pension on her husband’s contributions. 

(3)	She gained an increase in the graduated retirement benefit. This is payable in respect of contributions made under the pre-1975 scheme. After Mr R’s death she continued to receive her own entitlement for her own contributions and also a benefit from half her late husband’s contributions. 
(4)	She lost a weekly sum from her entitlement to additional pension. The maximum entitlement from her own contributions was £116.72. She inherited her late husband’s entitlement of £90.37. On the other side, she had a deduction for her own occupational pension of £95.99 and a deduction for the occupational pension inherited from her late husband of £42.51. However, there is a maximum amount of additional pension payable to any one pensioner in any week. When Mr R died, the maximum amount was £143.08.  The Pension Service allowed Mrs R entitlement of that amount, and then deducted both her own and her inherited pensions from that sum. The balance left was £4.58 a week. 
 
(5)	In summary, on Mr R’s death, Mrs R:		
•	Gained £42.51 weekly inherited occupational pension (as measured by GMP)
•	Gained £1.64 weekly basic pension
•	Gained £3.58 weekly graduated retirement benefit
•	Lost £16.15 weekly additional pension

Of course, she no longer had any of her husband’s pension to share.
	
The cap on additional pensions
16	Entitlement to pension based on the pensioner’s own contributions is referred to as a Category A pension. Entitlement to a Category A additional pension is subject to a maximum or cap.  The maximum entitlement arises from the way in which the individual’s contributions are calculated and then taken into account for additional pension purposes. This is because there is an upper limit on the contributions that can be paid. An employed earner pays an employee’s contribution on earnings up to the weekly upper earnings limit applying at the time. The total contributions for the year cannot exceed 53 times the weekly upper earnings limit. This caps additional pension entitlement at the pension payable on contributions at the annual upper earnings limit.

17	A widow (and, now, widower or surviving civil partner) may also receive additional pension by inheriting the contribution record of the late husband (or wife or civil partner). 
Parliament provides a different cap in these cases. It is called the “prescribed maximum”. The main rule is in section 52(3) of the Social Security Contributions and Benefits Act 1992 (“the 1992 Act”).  This allows a surviving spouse to receive an amount of additional pension payable by reference to the additional pension entitlement of the late spouse. It is payable up to, but not beyond, the weekly amount of the prescribed maximum. 

18	The prescribed maximum is set by the Social Security (Maximum Additional Pension) Regulations 1978 (SI 1978 No 949).  It is calculated in the same way as the individual cap, that is, by reference to 53 times that year’s weekly upper earnings limit.  There is a complicated standard calculation of the maximum additional pension for the year from April 2005 to April 2006 in the papers. It shows the maximum as being £143.08 a week when Mr R died. 

19	It follows from this that a widow cannot be entitled to more additional pension than she would have received if she had herself contributed on earnings at the upper earnings limit throughout the period that she and her late husband actually contributed. 

The offset for occupational pensions
20	The maximum additional pension is only paid to pensioners who have paid national insurance contributions at the maximum level at the non-contracted-out rate of contribution.  In practice few people do this. Most employees –particularly higher paid employees – worked in contracted out employment. They paid the reduced rate of contribution. This is true of both Mr R and Mrs R. They are therefore only entitled to the balance payable when the values of their occupational pensions are deducted from the notional maximum amount.  The value is the GMP (or contracted out deduction). 

21	Widows and other survivors who inherit pensions also have the inherited pensions set against their entitlement to additional pension. I do not need to set out the law on this because the question was explored thoroughly by Commissioner Turnbull in his decision R(P) 1/03.  I respectfully agree with that decision and apply it here. The law is found in section 46 of the Pension Schemes Act 1993 read with section 52 of the Social Security Contributions and Benefits Act 1992. The GMPs for both the pensions to which a widow is personally entitled directly and for those to which she is entitled by inheritance are to be deducted from the maximum entitlement of the widow under section 52. In other words, the widow’s maximum entitlement is calculated before, not after, any additional pension is deducted. This may mean that the widow’s total additional pension is limited by the “prescribed maximum” before the occupations pensions are offset. That is what happened here. 

Applying the rules to Mrs R’s pension
22	The Pension Service calculated Mrs R’s pension after her husband died by reference both to her entitlement to a Category A pension based on her own contribution record and to her entitlement to a Category B pension based on her late husband’s contribution record. In calculating her entitlement the Pension Service took into account the rules about limits to entitlement in section 52 of the 1992 Act.  This resulted in a small increase to her basic pension but a rather larger decrease in her entitlement to additional pension.

23	The tribunal confirmed that calculation while granting permission to appeal because of Mrs R’s contention that there should be some sort of proportional adjustment to inherited contracted-out deductions.  Her grounds of appeal as stated on the OSSC1 put the point concisely:

	“My contention is that the Pension Service’s calculation of [my] inherited pension is 	flawed and unjust remains. [The tribunal] states that: “the tribunal could find no 	authority for her contention that there should be a proportional adjustment to the 	inherited contracted out deductions and the tribunal concludes that the law does 	require that her additional pension is restricted to the prescribed maximum before a	 contracted out deduction is applied.”

	The decision R(P) 1/ 03 to which [the tribunal] refers does not deal with the issue of 	proportional adjustment to the inherited contracted out deductions only the stage in 	the calculations at which any deductions would be made. In this respect [I] raise 	important issues which need to be decided by the Commissioner who, in his decision 	R(P) 1/ 03, makes the point that the GMP would not be deducted twice. In effect the 	manner in which the Pension Service carried out the calculation means that, because 	of the cap, £26.37 of Mr R’s pension is actually inherited but subject to a £42.51 	deduction. This means that Mrs R’s £116.72 additional pension is reduced by her own 	GMP and then by a second deduction of £16.14 from her inherited GMP. This is 	disproportionate and unjust.”

24	The concept of proportionality is one of comparing means with ends. It is normally a relevant consideration when judging the exercise of judicial or administrative discretions. It is not relevant as a proposition of law, rather than of policy, where a statutory regime requires that a calculation take place in accordance with strict rules that provide no duty or power to do other than apply the rules in a defined order. The statutory rules, read with the decisions mentioned above, set down the rules to be followed and the order in which they are to be followed. They leave no discretion to the Pension Service or the courts or tribunal judiciary.  That aspect of Mrs R’s argument cannot therefore succeed. 
25	I do not agree that the tribunal decision, or that of the Pension Service, is flawed in law. Both have applied the correct rules in the correct order. What has happened in Mrs R’s case is that the operation of the rules imposing a maximum entitlement, or cap, have cut across the operation of the rules about offsetting so as to reduce one element of her state pension. 

26	The full explanation draws in the rules laid down in the Social Security (Inherited SERPS) Regulations 2001 (SI 2001 No 1085), included in the papers. These apply to cases where someone becomes entitled to a Category B retirement pension as a surviving spouse or partner on or after 6 10 2002 in respect of a deceased spouse or partner who reached pensionable age before 6 10 2002.  That includes Mr and Mrs R. Those regulations retrospectively amend the provisions in the 1992 Act so as to provide, in this case, that Mrs R inherits the whole of her late husband’s entitlement to additional pension rather than the 50 per cent inheritance level generally applying under the legislation. That has been taken into account in the figures set out at paragraph 14 above. In Mrs R’s terminology, she “actually inherited” entitlement to an additional pension of £90.37. But this was capped by other rules to prevent her receiving more than the maximum additional pension provided by the state system. 

27	The offset against her inherited entitlement is limited to the GMP of her widow’s pension, which is 50 per cent of Mr R’s GMP and is therefore £42.51. (His GMP was £85.02).  She therefore inherited the whole of his additional pension entitlement but an offset of only half that pension. But for her own pension entitlement, that would have increased her entitlement to additional pension by a large sum. It is the capping rules, and not the rules about inheriting pensions, that have resulted in the reduction of Mrs R’s additional pension. 
There is therefore no double deduction in respect of her late husband’s GMP. Nor is there any deduction of any amount greater than the GMP on her inherited pension.    

28	Is that unjust? As a matter of law, the answer must be no. Mrs R’s basic pension and graduated retirement benefit both increased when her husband died. Her additional pension decreased under a proper application of the rules laid down by Parliament. Those rules reflect the receipt by her of a widow’s pension from her late husband’s occupational pension scheme as well as receipt of her own occupational pension scheme. Parliament has provided that both should be taken into account as both were contracted-out schemes for which lower levels of national insurance contribution were payable. Parliament has also provided rules that prevent widows (or other surviving partners) receiving more from the scheme than others. Those rules have been applied accurately and properly in this case.   

29	I conclude that the decisions of the Pension Service for the Secretary of State and the tribunal were both correct in law if the Pension Service is correct in treating Mrs R as being entitled to both a Category A pension and a Category B pension when her husband died.
There is a further aspect to the case, not explored by Mrs R, the Pension Service or the tribunal that I consider I should investigate in order to see if Mrs R was awarded the best available pension in her particular circumstances. That is the question whether Mrs R would have been better off if she had claimed only a Category A pension, or a Category B pension, rather than both. 

Did Mrs R have other options?
30	On what basis was it accepted that Mrs R claimed both a Category A pension and a Category B pension? Would Mrs R be better not claiming the benefit of her husband’s contributions? I directed the secretary of state's representative to give me a copy of Mrs R’s pension claim form and details of why, in her case, she had been assumed to have applied for both a Category A pension and a Category B pension. I also directed the secretary of state's representative to inform me of the position if Mrs R had not claimed, or disclaimed, the Category B pension. 

31	 The Pension Service was unable to produce Mrs R’s claim form either originally on her first claim or when Mr R died. Further, the Pension Service and the secretary of state's representative disagreed with each other about whether Mrs R did, or needed to, claim when Mr R died.  Mrs R agreed with the account given by the Pension Service. She notified her husband’s death to the authorities as required. When that notification was received by the Pension Service, it was treated as Mrs R notifying a change of her circumstances. The Pension Service reviewed her pension award and issued a supersession decision changing her entitlement.  It did so on the assumption that she had already claimed both a Category A pension and a Category B pension.

32	 The information provided by the Pension Service is that Mrs R claimed her pension on 15 03 1999, the award being made on 23 03 1999. The date of claim is important because it decides whether Mrs R was claiming only a Category A pension or both a Category A pension and a Category B pension.

33	In principle, a married woman or widow is required to make separate claims for any Category A entitlement and any Category B entitlement. This follows from the decision of the Court of Appeal in Secretary of State v Nelligan, reported as R(P)  2/03. However, Regulation 9 of the Social Security (Claims and Payments) Regulations 1987 read with Part I of Schedule 1 to those regulations provides that a claim made for a retirement pension of any category can be treated as a claim for a retirement pension of any other category. Mrs R’s claim can be treated as a claim for both Category A pension and Category B pension if she was entitled to both pensions at that time. A problem arose in the Nelligan case because Mrs Nelligan was entitled to a Category A pension, but not a Category B pension, when she made her original claim. In this case, on the facts, Mrs R made her claim after her husband had reached retirement age, as he was more than 5 years older than her. So the Pension Service could, and I accept did, treat her claim as a claim for both Category A and Category B pensions. Her Category A entitlement was higher than any entitlement she could receive as a Category B pension while her husband was alive. So her Category B entitlement added nothing to her weekly entitlement.

34	It follows that the Pension Service acted correctly (a) in assuming that Mrs R had applied for both Category A and Category B pensions, and (b) in regarding Mrs R’s notification of her husband’s death as also a notification that her own circumstances had changed.

35	Could Ms R have disclaimed her Category B pension entitlement and thereby avoided a reduction in her widow’s pension? I directed the secretary of state's representative to set out the views of the Secretary of State on that issue. In a full and helpful reply, Mr Kendall for the Secretary of State detailed what, in the view of the Secretary of State, are the possible options for Mrs R.

36	Mrs R was entitled to £94.18, subject to subsequent updating, from the week after Mr R died. This was the original decision of the Secretary of State and is based on both Category A and Category B entitlements. On the calculations shown in the papers, if Mrs R had claimed a Category A pension only, she would have been entitled to £84.38.   If she had claimed a Category B pension only, her entitlement would have been £85.63.

37	It may appear counter-intuitive that Mrs R would be worse off disclaiming her own Category A pension rather than the Category B pension, and also that she would be better off maintaining her existing claim rather than abandoning one of the two pensions. But, subject to one point I discuss further, I agree with the submission made by Mr Kendall for the Secretary of State. This is because the rules about offsetting entitlements produce different results on Category A and Category B pensions. 

38	If Mrs R claimed only a Category B pension, then she would receive a full basic state pension and (for the reasons set out above) her late husband’s full graduated retirement pension. But she would not receive any additional pension either in her own name or from him. This is because the combined offsets of her own contracted-out deduction or GMP, plus that inherited from her husband, extinguish any additional pension entitlement.

39	The same thing happens in reverse if Mrs R claimed only a Category A pension, save that she was not entitled to a full basic pension on her own contributions. While she would receive slightly more weekly from her own graduated retirement benefit entitlement, the net result is slightly lower in total. On this basis also, she receives no additional pension after the offsets are taken into account.

40	 I add that this is the result of applying these alternative to Mrs R’s own and slightly unusual position. It may be that the result would be different in other cases.  

41	   One point needs more detailed consideration. Why should Mrs R have a deduction from her pension of both her own GMP and that of her late husband if she claims either only on his contributions or only on her contributions, and not both? The answer in practical terms is that she continues to receive both her own contracted-out occupational pension and that inherited from her late husband whatever claim she makes. Both were funded by the lower contracted-out contributions paid by her and her late husband. There is therefore a sound policy reason why both should be taken into account for as long as they remain in payment either to the contributor or to someone claiming on inheritance from a contributor.

42	I am satisfied, without going back through the minefield of provisions examined by Commissioner Turnbull in R(P) 1/03, by the Court of Appeal in R(P) 2/ 03, and by me in R(P)  1/ 04, that that is the result to which the provisions in the Pension Schemes Act 1993, the Social Security Contributions and Benefits Act 1992 and the relevant regulations lead. 
The central provision is section 46(1) of the Pension Schemes Act 1993. That subsection, as relevant to this case, provides:

	“Where for any period a person is entitled both –
	(a) to a Category A or Category B retirement pension … and
	(b) to one or more guaranteed minimum pensions,
	the weekly rate of the benefit mentioned in paragraph (a) shall for that period
	be reduced by an amount equal –
	…
	(ii) to the weekly rate of the pension mentioned in paragraph (b) (or, if there is 
	more than one such pension, their aggregate weekly rates).”

43	In my view the reference to “a Category A or Category B retirement pension” in that subsection should be read to include the case where the pension is based both on Category A entitlement and Category B entitlement.  It would make no sense at all in that context for the deductions to apply as stated to only part of a pension based on the two categories, or to be applied separately to each part of the pension. That could lead, on a literal interpretation, to overdeduction for the GMPs.  The Act makes it clear elsewhere (see section 17) that the widow is entitled to a GMP in her own right when inheriting a pension from her husband, so the section clearly applies to that also. 

Conclusion
44	I therefore reach the conclusion that Mrs R was awarded the correct amount of weekly pension on the basis that she was claiming her entitlements both to Category A pension and to Category B pension. The original decision of the decision maker acting for the Secretary of State, as confirmed by the tribunal, is correct. 

45	Although this was not looked at by the tribunal, I am also satisfied that this is the best approach for Mrs R in her own circumstances, and that she would have gained nothing by basing her claim either only on her own Category A pension entitlement or only on her husband’s entitlement. 

									David Williams
									Commissioner 
									25 06 2007									
 [Signed on the original on the date stated]