On 20 November 2020, the High Court ruled that pension schemes will need to revisit individual transfer payments made since 17 May 1990 to check if any additional value is due as a result of GMP equalisation. This latest judgment in relation to the Lloyds banking group pension schemes follows just over two years on from the landmark Lloyds case which confirmed that schemes need to equalise pensions for the effects of unequal GMPs. While it addresses another unknown for schemes looking to implement GMP equalisation, it will also add to the work required to complete such exercises.
The most immediate considerations for many schemes will be to understand the potential scale of any impact and to consider the implications for sponsors’ accounts, particularly those reporting at the end of 2020.
Members who exercised their statutory right to transfer their benefits will be able to have a top-up payment made from their former scheme to the scheme to which they transferred their benefits. The top-up payment should be the shortfall between the original transfer payment and what would have been paid if benefits had been equalised at the time, with interest in line with Bank base rate plus 1% each year.
For many schemes, there will be significant difficulties in complying with this judgment – in some schemes the data may no longer exist, and in others the costs of checking the position and contacting members may exceed the benefit to members in many cases. There are no time limits on claims, so cases will need to be reviewed back to 1990.
There may also be practical problems in making a top-up payment, for example where the receiving scheme no longer exists, or is unwilling to accept the transfer, or if the member no longer has benefits in that scheme. In these cases, trustees will need to agree with the member how to compensate them for the original shortfall.
We expect that trustees will want to find pragmatic ways of addressing past cases, so that the work is as efficient as possible.
The judgment reconfirms that a defined benefit scheme is obliged to equalise for unequal GMPs in relation to any GMP they have received which was earned after 17 May 1990. A scheme has this obligation regardless of whether or not it receives a top-up payment from the transferring scheme. The judgment does not address the position of defined contribution schemes or personal pensions, so for the time being it appears these schemes need only take action if they receive a top-up payment.
‘Bulk transfers’ that were made with actuarial certification, for example on a scheme merger, or following a business acquisition, are considered separately in the judgment. No action is required from the transferring trustees in these cases; the receiving trustees are responsible for ensuring GMP equalisation in their scheme. Further consideration may, however, be required where “mirror-image” benefits were not provided.
The judgment does not directly impact any work that schemes may have already been doing in relation to implementing GMP equalisation, although it does help to clarify the position for members who transferred in GMPs from other schemes. What it does is to add a further category of members for whom their position needs to be resolved.
Currently, this judgment is the final guidance we are expecting from the Courts on GMP equalisation. It confirms that past transfers must be equalised, but leaves a number of practical implementation questions to be addressed by individual schemes.
Often any top up payments will be small, and it could be expensive to work out and make payments, particularly as member details may be incomplete and details of the approach and assumptions used for calculating the original transfer value may not have been retained. In practice, we believe trustees will be looking for scope within the judgment to take a pragmatic approach.
