GMP Equalisation: Unanswered benefit transfer questions to be considered by the UK High Court

In 2018, when the Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc and others case ([2018] EWHC 2839 (Ch)) (the Lloyds Bank Case) confirmed that defined benefit pension schemes would need to equalise benefits provided by the scheme to remove any inequality deriving from Guaranteed Minimum Pensions (GMPs), it left pension scheme trustees and employers with a number of significant questions in relation to what was required of them.

A long-standing concern was the uncertainty around what would be the best method to equalise benefits.  This was a point which the court had provided a reasonable amount of guidance on in the original judgment and then further clarification was given in a second Lloyds ruling in 2018 (see: Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank Plc and others [2018] EWHC 3343 (Ch)).  Since 2018, a significant amount of work has been carried out in order to help schemes’ trustees and employers to decide which method to proceed with, though for most schemes this complex work continues and no decisions have been made yet. Nonetheless, several important issues remain unanswered and require further guidance, including one relating to past transfers out of members’ benefits.

How to reflect equalisation adjustments in transfers made by members after the 2018 judgment was an immediate issue for scheme trustees following the first judgment.  In many cases, a methodology for making adjustments was adopted, despite the scheme’s benefits not generally having been equalised.  In other cases, no adjustment was made, with trustees electing to defer this until the scheme’s overall equalisation approach was resolved.

Transfers out made before the 2018 judgment presented a more difficult issue. These transfers were made when it was not clear that equalisation relating to GMPs was a legal requirement. In most cases no adjustment would have been made. Are those transfers out now invalid? Do the former members concerned now require a top-up?  How many years of transfers out should trustees revisit and potentially correct?

Under section 99 of the Pension Schemes Act 1993, a trustee is usually discharged from the obligation to provide benefits to a member, following a transfer out of a scheme. However, this discharge only applies to GMPs where the obligation to provide a GMP has come to an end. Whether or not such an obligation to provide the GMP survives in the case where a trustee has failed to equalise the GMP, and has therefore underpaid the transferred-out benefit, is yet to be addressed.

The first Lloyds judgment clarified that limitations on claims and forfeiture provisions set out in scheme rules could apply so as to place a limit on how far back trustees need to go in correcting amounts already paid that should have been equalised. For example, it may be that for a particular scheme, only instalments of pensions paid during the six years prior to 2018 would need to be corrected for equalisation.  However, it is not clear whether these limitations can be relied on in relation to past transfers out, as transfers out are a statutory right rather than a right set out in the scheme rules.

In the event that trustees are required to equalise past transfers out, there could be significant implications for employers and trustees of all formerly contracted-out pension schemes. The decision could even affect employers and trustees of contracted-out schemes which have now been wound-up where a bulk transfer was made to another scheme.

Following a further application from the trustee in the Lloyds Bank Case to the High Court, a hearing on this matter took place in May 2020. At the request of the judge, the case was restored for a further two days’ hearing which took place on 29 and 30 October 2020.

A ruling on this point is eagerly awaited by employers and trustees of formerly contracted-out pension schemes and pensions lawyers alike. Judgment is expected soon, and we will be providing an update when the judgment is handed down. In the meantime, as the time approaches for many schemes to resolve their approach to these issues, look out for our forthcoming guide on GMP Equalisation.