Pensions Alert: GMP Equalisation and Past Transfers

It is just over two years since the High Court issued its October 2018 landmark ruling in the case of Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc and others which held that pension schemes must equalise benefits to compensate for the effects of Guaranteed Minimum Pensions (GMPs) accrued between 17 May 1990 and 5 April 1997.

The October 2018 judgment dealt with a number of issues in relation to the obligation of the trustee of three Lloyds Banking Group pension schemes (Trustee) to equalise benefits for the effects of GMPs. However, the 2018 judgment did not consider the Trustee’s position in relation to historic transfers out from the schemes where the transfer payments were less than they ought to have been because the Trustee had not taken into account this obligation to equalise benefits. On 20 November the High Court published a further judgment in the Lloyds case which considers a number of questions concerning the Trustee’s position in relation to historic transfers out.

This judgment is important for occupational pension schemes that were contracted-out on a salary-related basis between 17 May 1990 and 5 April 1997 and which have made transfers out in respect of members who accrued contracted-out service in this period that did not reflect GMP equalisation. Trustees will have to consider what action they need to take in terms of revisiting these transfers out as a result of the High Court’s conclusions.

In this Pensions Alert we provide an overview of some of the High Court’s key conclusions and flag some of the issues arising for trustees as a result of the judgment.

The scope of the judgment

The questions which the High Court was asked to consider were confined to the position as between the Trustee of the transferring scheme and the transferring member. They did not ask the High Court to determine the position as between the Trustee and the receiving schemes.

It was also agreed that the questions leave aside, and are without prejudice to, the effect of any contractual obligations that may have been undertaken in relation to particular transfers out and any individual estoppels that might arise. This was subject to an exception to the extent necessary to answer a question about discharge forms signed by transferring members.

The judgment looks at three different types of transfers: (1) those made under the statutory provisions relating to Cash Equivalent Transfer Values (the CETV legislation); (2) individual transfers made under provisions in the relevant scheme rules; and (3) “mirror-image” bulk transfers.

Statutory transfers

The High Court considered a number of questions concerning statutory transfers made under the CETV legislation, with key conclusions including the following.

Breach of duty

The High Court concluded that: (1) the Trustee owed a duty to a transferring member to make a transfer payment which was correctly calculated and reflected the member’s right to equalised benefits; (2) it committed a breach of that duty in some cases by making inadequate transfer payments that did not reflect this right; and (3) the Trustee remains liable to the transferring member for this breach of duty.

Remedying the breach

It was held that transferring members are entitled to seek a remedy against the Trustee and, in particular, an order from the court that the Trustee belatedly performs its duty to pay the correct transfer payment by making a top-up payment to the receiving scheme. The relevant schemes’ forfeiture rules and the Limitation Act 1980 were considered but the High Court concluded that such a claim by a member is not time-barred. This finding means that all transfers out which relate to members with contracted-out benefits accrued in the period 17 May 1990 to 5 April 1997 are potentially within scope of the judgment.

The High Court concluded that the Trustee does not have the power to choose whether to provide a residual benefit or to make a top-up payment. It stated that the Trustee had a duty to calculate the transfer payment correctly, that duty was breached and it can now be ordered to make a top-up payment. It also concluded that the Trustee is not able to require a member to accept a residual benefit and the member is not entitled to require the Trustee to provide a residual benefit rather than a top-up payment. However, it would be open to the Trustee and a member to agree an alternative to the Trustee performing its duty to make a top-up payment. The High Court also concluded that the top-up payment should bear simple interest at 1% above base rate.

Is the trustee under an obligation to be proactive?

It was also concluded that the Trustee is able belatedly to perform its duty even without a court order. The High Court had been asked whether the Trustee is under an obligation proactively to identify and calculate any shortfalls in previous transfers out and take steps to equalise them or whether it is entitled to wait for a request to be made. It is worth noting that the parties agreed that, in answering this question, the High Court should not reflect considerations such as the sums involved by way of top-up payments and the administrative costs involved in the Trustee proactively addressing past transfers. It was stated that the Trustee would consider the answer given to this question and decide for itself what course it would adopt. The judge stated that “the Trustee does need to be proactive in that it must consider the rights and obligations which I have identified, the remedies available to members and the absence of a time bar and then determine what to do”.

It is therefore clear that trustees need to consider this judgment and determine what to do, even in the absence of claims from affected members. What is not clear is what directions the High Court might have given to the Trustee had it been asked to take these wider considerations into account.

Discharge of liability

The High Court concluded that the terms of the statutory discharge in the CETV legislation did not discharge the Trustee from its liability. Provisions in the relevant scheme rules and five sample discharge forms were also considered, but it was concluded that these did not discharge the Trustee from its liability under the CETV legislation either.

Receiving schemes

The High Court was also asked what the position would be if the transferring member had subsequently transferred out of, or otherwise ceased to be a member of, the receiving scheme. Noting the need to consider the circumstances in particular cases, this was one of the questions that the High Court did not answer. However, the judge did comment that if a transferring member brought proceedings and established that the Trustee had made an inadequate transfer payment, the court “would be reluctant to hold that supervening events meant that the Trustee was no longer obliged to make any payment to anyone”. These issues may arise when trustees consider the circumstances of their own scheme and therefore may be issues in respect of which they need to take advice.

The High Court rejected an argument that the liability of the transferring scheme to provide a top-up payment was released because of the obligation on the receiving scheme under EU law to equalise benefits in relation to transferred-in members. It held that they are concurrent obligations which both, in law, fall to be performed. Trustees will need to consider what this might mean in practical terms in respect of members where the receiving scheme has equalised (or plans to equalise) transferred-in benefits for the effect of GMPs.

Individual transfers under the scheme rules

In the case of individual transfers made under provisions in the scheme rules, the High Court considered the relevant scheme rules and also noted a 2013 Supreme Court judgment (Pitt v Holt) which held that a decision made by a trustee which involves “inadequate deliberation” (for example, failing to consider relevant matters) is voidable (rather than void) if the decision involved a breach of duty by the trustee.

The High Court concluded that: (1) as the power in relation to individual rule-based transfers has been exercised, the transferring member no longer has rights under the transferring scheme unless the court sets aside the exercise of the power and the transferring member can require the Trustee to exercise the power afresh; (2) the transferring member can only ask the court to set aside the Trustee’s decision if the Trustee had committed a breach of duty when exercising the power; and (3) whether the Trustee committed a breach of duty in that way would require an investigation of the relevant circumstances which was not carried out in this case. The High Court also stated that, in relation to individual rule-based transfers, the relevant scheme rules provide for a discharge for so long as the decision as to the amount of the transfer payment remains valid and effective.

Issues that trustees may need to consider when looking at transfers made under their own scheme rules include the drafting of the scheme rules, whether a breach of duty was committed and whether the trustee needs to be proactive in addressing these transfers.

Bulk transfers

The only question that the High Court was asked to address in relation to bulk transfers was whether, in the case of “mirror-image” bulk transfers out (where rights under the receiving scheme are the same as under the transferring scheme), the Trustee is discharged from an obligation to equalise by virtue of certain provisions in the preservation legislation. The High Court was asked to proceed with this question on the basis that the transfer complied with regulation 12 of the 1991 Preservation Regulations in relation to bulk transfers without member consent.

It concluded that, where regulation 12 has been complied with and the bulk transfer was in accordance with the rules of the transferring scheme, the transferring members are entitled to benefits under the receiving scheme and are no longer entitled to benefits under the transferring scheme.

Trustees will need to check the terms of bulk transfers in to, or out of, their scheme.

Conclusions

GMP equalisation and past transfers out is a complex area and the judgment raises a number of issues for trustees that will need detailed consideration as part of their GMP equalisation projects.

In terms of initial steps, trustees may find it useful to work with their administrators to understand what information the scheme holds in relation to: (1) transfers out in respect of members with contracted-out service in the relevant period; and (2) which of the three categories noted above the transfers fall into. This may help trustees start to understand the extent of this issue for their scheme, as well as the extent to which gaps in scheme records may cause difficulties in addressing historic transfers out.

This is another high profile judgment in relation to GMP equalisation, and has been reported in the national press. Trustees may want to consider including a communication to members in an upcoming scheme newsletter or scheme website update to note that the judgment has been issued and that they will consider the implications for the scheme. They may also want to discuss with the scheme administrators how any member queries raised on this subject should be dealt with.

If you would like any further information on this judgment or have any queries in relation to it, please get in touch with your usual DLA Piper pensions contact.