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Lloyds 3: GMP equalisation and past transfers

  • United Kingdom
  • Pensions


Speedy summary

We’ve known since October 2018 that schemes must equalise for the effect of GMPs. The final judgment in the long running Lloyds Bank GMP equalisation saga looked at what this means for individual and bulk transfers that trustees have made since 17 May 1990.

The judge concluded that individual transfers should have been calculated on an equalised basis. Where they were not, the transferring scheme retains a liability to those members.

This speedbrief looks at what the case decided and what next steps trustees and employers should take. Sadly, as with the previous Lloyds decisions, the case leaves open as many questions as it answers, and leaves all parties having to weigh up how much to spend addressing this issue in exchange for (typically) only a very small gain for the average member.

Brief actions

Trustees should consider the implications of this judgment carefully and include historic transfers out as part of their GMP equalisation project.

Their first step will be to gather information. They will then be able to decide what to do next and how proactive they want to be. In particular, they should:

  • review their GMP equalisation action plan
  • identify the number of members potentially affected
  • identify the approximate amounts of any top-up payments they would need to make
  • consider whether they have sufficient data in relation to members who have transferred out to calculate top-up payments
  • identify if there have been any bulk transfers and the terms of those transfers
  • consider the wording of any discharge forms
  • talk to the scheme sponsor to explain the possible effect of this judgment on the scheme and to understand its position on this

Employers will want to understand the approach the trustees are proposing on this issue and consider the funding and administrative costs involved.

Some more detail

Statutory transfers

The starting point is that the judge said a statutory transfer value should be equalised in relation to a transferred GMP.

If trustees paid an unequalised transfer payment in the past, they breached their legal duties. This means that the member can ask the transferring trustees to pay a top-up to the receiving scheme.

Non-statutory transfers

Many schemes allow members to transfer out even when they don’t have a formal statutory right to do so (for example, if they were very close to retirement age or they took a partial transfer).

In these cases, the judge decided that, if the trustees didn’t take account of GMP equalisation when deciding the amount of the transfer payment, this could make the trustees’ decision to pay the unequal transfer payment potentially invalid. However, it would require an application to the court from an affected member to challenge the decision.

Bulk transfers

The position in relation to bulk transfers is similar to the position in relation to non-statutory transfers. However, as they are done without consent, they must also satisfy the requirements of the Preservation Regulations.

The judge said that “where regulation 12 [of the Preservation Regulations] has been complied with and the bulk transfer was in accordance with the rules of the transferring Scheme, then the transferring members are entitled to benefits under the receiving scheme and are no longer entitled to benefits under the transferring scheme”.

The judge was asked to assume that mirror image benefits would be provided on a bulk transfer. This however is not always the case. Schemes that have made or received bulk transfers may want to check the terms of their rules for the transferred liabilities and the terms of the original transfer agreement.

Are transferring trustees still ‘on the hook’?

Potentially – yes.

Statutory discharge? The law gives transferring trustees a statutory discharge if they have “done what is needed to carry out” a statutory transfer request. The judge in Lloyds 3 however concluded that this could not be relied upon to give a discharge where the trustees had paid a lower transfer value than that to which the member was actually entitled (because of GMP equalisation).

Scheme rules? If the scheme rules include a discharge on transfers, this will not help in relation to statutory transfers. This is because a discharge in scheme rules will not override the legal obligation to pay a transfer value calculated on an equalised basis.

In relation to a non-statutory transfer, so long as the trustees’ decision was not voided by the court, a discharge in the scheme rules could be binding.

Where a bulk transfer satisfied the requirements of the Preservation Regulations, the trustees could be validly discharged, although again it should be noted that the questions the judge was asked related to mirror image bulk transfers.

Discharge forms? The judge considered the wording of the discharge forms used by the Lloyds Bank Schemes. He concluded that, where the member waived an entitlement to “any further benefit from the scheme”, this did not cover any entitlement to require the trustees to make a top-up payment to the receiving scheme. The forms did not discharge the obligation to make the top-up payment.

If you are thinking of relying on discharge forms, please note that there were lots of other arguments about why the forms could not be relied upon. The judge didn’t need to consider them in this case, but they could be relevant to you.

Can limitation periods and forfeiture clauses help?

Unlikely. The judge held that the schemes’ forfeiture provisions did not apply to the top-up payments. He also suggested that forfeiture clauses might be overridden by the Pension Schemes Act 1993, which prevents scheme rules from overriding the transfer legislation.

No statutory limitation period applies to these claims.

How would this work in practice?

If members have taken a statutory transfer from a scheme calculated using an unequalised GMP, they can only require the scheme to make a top up payment by applying to the court for one.

Must transferring trustees proactively offer members a top up? The case was not clear on this. So, this is a judgment call for trustees to consider as part of their wider GMP equalisation project.

In making this decision, it is worth noting that it was pointed out to the judge that the administrative costs of calculating often very small top-up payments could vastly exceed the value of the payments. He said:

“all that I can usefully say is 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”.

A relevant factor here will be whether the scheme plans to buy-out in the near future. Insurers will be interested to know what schemes have done in relation to historic transfers.

A top-up would be calculated using the transfer value laws that applied when the original transfer was made. In addition, interest at 1% above base rate should be added to the transfer payment.

Transferring trustees do not need to provide members with a residual benefit in their scheme.

The judge declined to answer questions about subsequent transfers by a member and what would happen if the scheme to which the member had transferred refused to accept a top up payment.