GMP equalisation: High Court signals a route to addressing past transfers

United Kingdom

More than two years from the original decision in the Lloyds Banking Group case, the High Court has delivered an important further judgment on guaranteed minimum pensions (GMPs) and past transfers of unequalised benefits. This provides some further clarity, combined with the promise of more administrative headaches.

The background

As set out in our Law-Now on the original judgment, the Court had held that trustees of pension schemes must equalise pension benefits for the effect of GMPs accrued between 17 May 1990 and 5 April 1997. Trustees and employers have been wrestling with the practical implications ever since.

The latest part of the proceedings concerned the treatment of members who had previously transferred benefits from the Lloyds schemes to other pension schemes, given that those transfers were not calculated on a basis which equalised for the effect of GMPs.

Were the transferring trustees discharged?

The Court has today held that where a scheme had made a cash equivalent transfer, calculated to give effect to a member’s statutory right to one (except in relation to GMP related inequalities), the scheme remains liable to make a correctly calculated top-up transfer payment to the receiving scheme. The transferring trustees could not rely on the statutory discharge in the Pension Schemes Act 1993 nor any discharge forms signed by members at the time. Although the member’s right was to a top-up transfer payment, it would be open to the trustees and member to agree an alternative remedy. Any top-up payment should bear interest at 1% above base rate.

The judge held that the existence of this obligation on the trustees of a transferring scheme did not alter the duty of the receiving scheme trustees to provide equalised benefits. These were concurrent obligations.

However, for other, non-statutory transfers (e.g. for members within a year of, or who have passed, their normal retirement date), the Court held that the member no longer had rights under the transferring scheme, unless (a point which it held open on the facts) the member could demonstrate the trustees had breached their wider duties. Where a bulk transfer had been made in line with pension preservation law requirements, the transferring trustees would also no longer have liability for the member’s benefits.

The judgment provides an overdue analysis of the landmark European Court of Justice decision in Coloroll, long-debated in relation to transfers and equalisation. The judge concluded that the transferring trustees owed the same liability to make a top-up payment under EU law as they did under domestic law.

Trustee duties to identify claims

The parties asked the Court whether transferring trustees were under a proactive duty to identify, calculate and correct shortfalls in previous transfers out, or whether they could wait until a request was made by the affected member or the receiving scheme. The judge was reluctant to be drawn on detail, simply concluding 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.”

Although the judge was clear that doing nothing was not an option, this could potentially open the door to some flexibility for trustees as to how they go about this exercise.

Actions for trustees and employers

Trustees and employers should already have a strategy in place for addressing outstanding GMP issues, through a permitted equalisation methodology and possibly in combination with the statutory option of ‘converting’ GMPs to normal scheme benefits. They now also have confirmation that they need to address historic transfers involving GMP.

Beyond the issue of GMPs, the case also flags the limits on the extent to which trustees can rely on a statutory, rules-based or contractual discharge in circumstances where they have made errors in calculating statutory transfers.

However, the judgment is extremely detailed (running to over 100 pages) and in some places is tailored to the circumstances and rules of the schemes in question. Trustees and their advisers will therefore need to digest the judgment fully before progressing their plans.

The judgment can be found here.