In the latest decision in the Lloyds Banking Group GMP equalisation case, the High Court has ruled that historic cash equivalent transfer values must be revisited where the transfer value would have been higher if it had allowed for GMP equalisation.
In the much-anticipated judgment in the latest round of the Lloyds Banking Group equalisation case, the High Court ruled on 20 November that past individual transfers out made under the cash equivalent legislation will need to be revisited, a decision that will add further cost and complexity to the task of scheme trustees to equalise for the effect of Guaranteed Minimum Pensions (GMPs). The Court further held that the statutory limitation period does not apply to such obligations and that trustees are unlikely to have been absolved of this obligation by any scheme discharge, member agreement or forfeiture provisions in a scheme’s rules. This means trustees face revisiting transfers that occurred up to 30 years ago.
Statutory individual transfers
For trustees of defined benefit (DB) schemes that have transferred out GMPs accrued between 17 May 1990 and 5 April 1997 under the cash equivalent legislation, they will need to revisit these transfers and correct them if they did not reflect a member’s equalised rights. Any top-up payment needed will have to be made to the receiving arrangement that accepted the original transfer. A member does not have the ability to require the trustees to provide a benefit in the transferring scheme instead nor do trustees have the ability to require a member to accept such a benefit. The top-up payment should be calculated as at the date of transfer and simple interest should be applied to it at the rate of 1% per annum above base rate. Investment loss does not need to be factored in.
Unhelpfully, the Court did not consider the possibility of the receiving scheme no longer existing, being unwilling to accept a top-up payment or the member having transferred their benefits on to another arrangement. In such circumstances, some other solution may need to be agreed with the member. Whilst the Court did not provide any comments in this regard, which would have been helpful, neither did it rule out alternative solutions being agreed between the member and trustees.
Non-statutory individual transfers
The position in respect of non-statutory transfers made in accordance with a scheme’s rules is less clear. A non-statutory transfer value might have been paid if, for example, the member-only wished to transfer part of his or her rights or if the member was aged less than one year below his or her normal pension age. Whilst the member has no rights remaining under the transferring scheme, the Court held that it may be possible for them to apply to court for the exercise of the transfer power to be set aside e.g. because the transfer value was not calculated in accordance with the scheme rules. This will depend upon the specific wording of the scheme’s rules. This potentially leaves the trustees in the position of waiting to see if members take such action. Consideration will need to be given as to whether to revisit such transfers in any event and trustees may well determine that they should.
The Court also considered the position in respect of bulk transfers out and held that where the bulk transfer was made in accordance with the requirements of the preservation regulations and the scheme rules, then the transferring scheme no longer has any obligations in respect of the transferring members. Instead, it will be for the receiving scheme to equalise for the effect of GMPs in respect of members who have transferred to it and to seek recompense from the transferring scheme if possible, depending on the terms of the bulk transfer.
Two years after the original momentous Lloyds’ decision that pension schemes must equalise GMPs, we now have some clarity on transfers out. Trustees will need to factor the outcome of this case into their GMP equalisation project plan, whilst scheme employers will have to consider its outcome on their accounting position, although it is expected that any top-ups payable will generally be quite small. Having to revisit past transfers out and in over the last thirty years will be no mean feat and will undoubtedly add to the time and cost involved in equalising for the effect of GMPs. Resolving this aspect of GMP equalisation will not be at all straightforward. Pragmatic and practical solutions are likely to be needed and trustees will have to rely on their advisers to determine what is reasonable in the circumstances.
Like the previous Lloyds decision, this judgment leaves a lot of questions unanswered and could have gone further to provide greater certainty.
The Court’s decision also results in a potential for members who retired and took their pension from the scheme being treated less favourably than those who chose to transfer out. In its 2018, judgment the Court held that forfeiture provisions in a scheme’s rules could – depending upon their exact wording – mean that any back payments due to pensioners as a result of GMP equalisation would (or could) be limited to 6 years. However, in its latest judgment, the Court has held that such a restriction does not apply to a member who transferred out of a scheme more than 20 years ago – and signed a discharge to the trustees. Many legal experts were surprised with the High Court’s decision in 2018 that forfeiture rules which provide for “unclaimed” benefits to cease to be payable after 6 years could operate to limit members’ entitlements where their benefits had been underpaid. The disparity between this and the conclusion reached in respect of past transferees could result in fresh scrutiny of this element of the original Lloyds decision.