DB trustees to equalise GMPs in past transfers following 'landmark' High Court ruling

The High Court has ruled that trustees of defined benefit (DB) schemes that provided Guaranteed Minimum Pensions (GMPs) should revisit and, where necessary, top-up historic cash equivalent transfer values (CETVs) that were calculated on an unequalised basis if an affected member makes a successful claim.

The judgment from Mr Justice Morgan, issued today (20 November), ruled that Lloyds Banking Group pension scheme trustees are responsible for equalising the GMPs for members who transferred out of one of its DB pension schemes.

The ruling is expected to have far-ranging consequences for the wider DB landscape, and will impact DB schemes that provided GMP, accrued between 17 May 1990 and 5 April 1997.

Unlike the first Lloyds GMP ruling, no time bar applies, which means that schemes will be unable to rely on provisions within the rules that would normally limit claims to a six-year period.

Commenting on the decision, Arc Pensions Law associate, Danyal Enver, explained: “As a result of the Lloyds judgment that came out today, trustees of pension schemes that have transferred out to other pension schemes have breached their duties where the transfer payments were not equalised for GMP.

"This means that members can successfully claim against the trustees of the transferring pension scheme and the receiving pension scheme and claim a top up payment to reflect the shortfall.

"However, the judgment does not require the trustees to proactively make these corrections to previous transfers. As a result, they do not have a set roadmap to resolve their breach, but they do not have any obligation to do anything following this judgment.

"Trustees can now decide if they want to remain with the uncertain possibility of unknown liabilities arising from members' claims, or if they want to take a complex, costly path to certainty by calculating and settling those liabilities now.”

Herbert Smith Freehills, regional head of employment, pensions and incentives, Samantha Brown, described the judgment as "another landmark ruling which extends the scope of schemes’ GMP equalisation exercises".

She added: “Once again, this ruling is likely to affect every DB scheme in the UK that provides GMPs accrued between 17 May 1990 and 5 April 1997.

"It means that trustees of such schemes are required to revisit cash equivalent transfer values paid to former members and make a top-up payment where a member has not been paid their full entitlement.”

“Trustees of affected schemes should already be taking steps to equalise the benefits of male and female members who are still in their scheme, following the ruling in the first judgment.

"These GMP equalisation projects will now need to be extended to include historic cash equivalent transfer payments.”

Trade Union BTU, which represents over 30,000 Lloyds Banking Group staff, has estimated that at least £2bn has been transferred out of the Lloyds DB scheme over the affected years.

Furthermore, it noted that of the 200 transfers looked at by the High Court, the average top-up payment required to equalise GMPs was £1,000, with one member entitled to £23,000.

The union also highlighted figures from The Pensions Regulator, which showed that between 2018/19, approximately 210,000 individuals transferred out of DB schemes more broadly, with a total value of those transfers of £34bn, stating that many of these savers will now benefit from the outcome of the ruling.

In addition to this, the judgment ruled that the trustees of Lloyds’s schemes are not discharged from the need to top-up historic CETV payments by any statutory provision, any rule of the schemes or by any agreement with the transferring member.

Furthermore, it noted that the trustees’ duty to correct inadequate transfers is not time barred or forfeited, either under the rules of the Lloyds’ schemes or under the Limitation Act 1980, which Brown warned could have "much wider implications", not limited to schemes dealing with GMP equalisation.

She stated: “The fact that trustees cannot rely upon any statutory, rule-based or contractual discharge and that claims are not time-barred could have much wider implications, and not just for schemes dealing with GMP equalisation, as it means that trustees may not benefit from any kind of discharge or limitation defence in other circumstances where transfers turn out to have been calculated incorrectly.”

This was echoed by Dalriada Trustees professional trustee, Adrian Kennet, who added: "Trustees who thought they were protected by discharge forms signed by members who transferred out now learn that they largely are not.

"They will now need to go hunting for data to recalculate transfers out of schemes as far back as 1990. It is yet another painful day in the subject of GMP equalisation - administration systems and processes are going to be really put to the test."

Hymans Robertson head of GMP equalisation, Matt Davis, also warned that the work needed under this ruling could represent a "very significant challenge for schemes", with some likely facing time constraints if due to report accounting figures at the end of December.

He stated: “This ruling addresses the thorny issue of pension schemes picking up the tab for GMP equalisation for past transfer values.

"This should be good news for some of those who took a transfer value as they may now be in line for a top up payment.

"However, the effort involved in revisiting transfers paid out by pension schemes across the industry over the last 30 years will be a very significant challenge for schemes, and in many cases historical data will not be available.

“For sponsors of pension schemes who report accounting figures under IAS19 the ruling is likely to trigger a need to assess extra accounting liabilities and the impact on P&L.

"For those due to report as at 31 December 2020 the timing of the ruling doesn’t leave much time to analyse this.”

The ruling follows the landmark Lloyds GMP High Court case in October 2018, which ruled that the scheme must equalise pensions benefits for men and women.

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