Last week, we published a blog post setting out the issues with GMP equalisation and highlighting the outstanding issues in relation to past transfers out (GMP Equalisation: Unanswered benefit transfer questions to be considered by the UK High Court). Following the landmark ruling in the first Lloyds Bank case in October 2018, on Friday (20 November), the UK High Court addressed the outstanding issue in relation to past transfers of benefits.
The High Court’s judgment deals with numerous issues in relation to defined benefit schemes in which GMPs accrued between 17 May 1990 and 5 April 1997; however, in our view, there are three key points to take away from the judgment.
Individual statutory transfers
Firstly, where pension scheme trustees made a transfer out of a scheme under the so-called ‘cash equivalent transfer value’ legislation and failed to reflect the member’s right to equalised benefits as part of that transfer, the trustees have not discharged their statutory obligations. As the obligation to equalise was not clear until 2018, very few trustees will have reflected the right to equalisation in benefit transfer values before then.
In relation to such transfers, where an individual member has exercised a right to transfer their benefits out of the scheme, the Court held that such trustees owed a duty under the ‘cash equivalent legislation’ to the transferring member to calculate the transfer payment correctly, and to accurately reflect the member’s right to equalised GMP benefits (specifically, sections 94-95 of the Pensions Schemes Act 1993 and Regulation 9(5) of the Occupational Pension Schemes (Transfer Values) Regulations 1996). As such, where the trustees failed to account for equalised GMP benefits when making a cash equivalent transfer out of the scheme, the trustees committed a breach of duty and remain liable for that breach.
The Court rejected the suggestion that there had been any statutory or rule-based discharge of that duty. The transferring member will therefore still be able to seek a remedy against such trustees - namely, a court order that the trustees should perform their duty to make the correct transfer top-up payment, reflecting the shortfall. The Court also confirmed that trustees are able to make such payments even without a court order requiring them to do so.
Importantly, the High Court held that the obligation to correct historic transfer payments in relation to individual statutory transfers is not subject to any limitation period, so there could potentially be an issue with such transfers out made over the many years in question (from 1990 to 2018).
Bulk statutory transfers
Secondly, where trustees made bulk transfers of members out of a pension scheme under the so-called ‘preservation of benefit’ legislation, and the trustees complied with both the relevant regulations and the rules of the transferring scheme in question, the transferring members no longer have a right to equalisation against the transferring scheme.
This aspect of the judgment is limited to ‘mirror-image’ bulk transfers, where the members have been transferred to another scheme without giving consent but their rights under the receiving scheme are broadly no less favourable as their rights under the transferring scheme. However, for trustees of transferring schemes to rely on this protection, it is essential that they complied at the time of the transfer with the relevant regulatory requirements, such as the requirement for certification by an actuary that the transfer credits under the receiving scheme were broadly no less favourable than the rights being transferred.
Thirdly, in the case of non-statutory ‘rule-based’ transfers out, where trustees transferred a member’s benefits under a power contained in the rules of the transferring scheme, that member no longer has any rights under the transferring scheme. This is subject to the caveat that the rules of the transferring scheme must be in accordance with the ‘preservation of benefit’ legislation referred to above.
However, it is still open to a member to ask a court to set aside the trustee’s exercise of power if the trustee committed a breach of duty when exercising the power, which will require an investigation into the relevant circumstances of each case.
Following this decision, we would expect trustees to be proactive in correcting any underpayments in relation to individual statutory transfers, rather than waiting for the affected member to obtain a court order. However, the administrative burden that this creates for trustees should not be underestimated, as trustees will be required to work out how to correct the payments, calculate the corrections and track down the members who took the transfers out. Also, this is made more difficult by the fact that under the Scheme Administration Regulations, pension schemes are only required to keep records of transfer payments for a minimum of six years. It could also have a significant financial implication, depending on the number of affected transfers and the administrative cost of the tracing and correction exercise.
Under both the landmark 2018 ruling and last week’s judgment, there are several considerations which employers and trustees need to take into account, when resolving issues in relation to equalising GMPs. Look out for our forthcoming guide on GMP Equalisation for both employers and trustees.