The third judgment in the Lloyds court proceedings on Guaranteed Minimum Pension (GMP) equalisation has now been handed down (Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank PLC & Ors  EWCh 3135 (Ch)) (Lloyds 3). This covers the duty of pension scheme trustees to equalise past transfers out of the scheme. Complying with the judgment will present a range of difficult practical issues for trustees. The extent to which full compliance is possible will, in many cases, depend on circumstances that are outside the trustees' control (e.g. the completeness of records on transfers out). We set out in this Insight a brief overview of the judgment and what trustees should do to avoid being left with undischarged liabilities.
Lloyds 3 may, subject to any appeal, be the final instalment of the Lloyds litigation. It may not be the last time that GMP equalisation and matters relating to it are the subject of court proceedings. However, this judgment is the final major piece of external information which trustees and employers have been waiting for before making decisions on how to resolve the GMP equalisation problem for their pension schemes.
Our 'Guide to GMP equalisation and how to deal with it' provides useful and relevant background information to the broader issues at stake in the Lloyds litigation.
What are the key points from Lloyds 3?
1. Trustees have duties in respect of unequalised past transfers
The judge concluded that where:
- a member has requested and taken a statutory transfer of pension benefits that include a GMP; and
- the amount transferred was less than it should have been to take account of the requirements of GMP equalisation
trustees have breached their obligation to transfer full benefits and do not benefit from statutory discharges. Trustees are required to consider what steps they should now take in order to remedy those breaches.
2. The duty is not straightforward
Lloyds 3 does not necessarily mean that all past transfers need revisiting. The judge distinguished between:
- statutory and non-statutory transfers; and
- individual transfers and bulk transfers.
This adds to the complexity of the historical analysis which may be necessary to work out which obligations remain undischarged.
3. How proactive do trustees need to be?
The judge did not come to a definitive view on whether:
- trustees must seek out all former members whose transfers have been underpaid; or
- it is acceptable to wait for people to come forward and claim a top-up.
The judge did, however, say that trustees should proactively consider the rights and obligations identified in the judgment, the remedies available to members and the absence of a time bar and then should make a decision on what to do. It was noted that the administrative costs of making top-up payments could well exceed the payments themselves, and the judge implicitly acknowledged that this is a relevant consideration. There is therefore scope to take account of scheme-specific factors, but trustees will need to take advice on this.
4. No time bar will apply in respect of transfers out
In contrast to his position on GMP equalisation more generally, the judge in Lloyds 3 concluded that the forfeiture rules in the Lloyds schemes did not apply to restrict his conclusions to transfers out made within the last six years. We will consider the position on forfeiture and its possible wider implications in a separate Insight.
Background to the change
For more detail on the previous Lloyds judgments, and our guide to GMP equalisation generally, including a basic explanation of why it is an issue, please see the following links.
All of this is set out together in our 'Guide to GMP equalisation and how to deal with it'.
What should trustees do now?
This judgment is one of the final pieces that we were awaiting in order for trustees and employers to have the complete package of expected materials from Government and the courts to inform any decisions on how to approach a GMP equalisation exercise. Although some gaps remain, they are ones that trustees and their advisers may need to fill themselves. For our practical suggestions for how to advance a GMP equalisation project generally, please see our 'Guide to GMP equalisation and how to deal with it'.
The following focuses on the practical steps arising specifically out of this latest judgment.
What new obligations arise?
Individual statutory transfers
Where members have exercised their statutory rights to take a transfer value out of an occupational pension scheme, Lloyds 3 makes clear that the trustees of the transferring scheme have an obligation to those members to make top-up payments to the relevant receiving schemes (if and to the extent that the transfer value would have been higher had it taken into account the requirement to equalise GMPs).
Interest is payable on the top-ups, at a rate of 1% above base rate.
Until the first Lloyds judgment was handed down in October 2018, most schemes did not equalise transfer values for the effect of GMPs, because of wider uncertainty over the questions of whether and how to equalise GMPs. There will therefore be a large number of historic unequalised transfers which trustees will now have to consider when and how to correct.
This applies even if members have signed discharge forms confirming that the transfer releases the transferring trustees of any further obligations to them. In Lloyds 3, this point turned in part on the drafting of the discharge forms that were used by the Lloyds trustees, so this part of the judgment is scheme-specific. However, the drafting that was considered was similar to that which many schemes will have used.
The receiving scheme may also be under a duty to equalise GMPs. If that is the case, it can use the top-up payment from the transferring scheme to help meet the cost. The fact that the receiving scheme may be under such a duty does not relieve the transferring scheme trustees of their obligation to make a top-up payment.
Individual non-statutory transfers
The position is less clear regarding transfers where the member did not have a statutory right to the transfer, but it was permitted by operation of the scheme rules. The judge left open the possibility that a member might be able to apply to court to set aside the exercise of the power in the rules, and require the trustees to exercise the power afresh. This would require the member to establish that the original transfer was in breach of duty.
Whether or not that is the case will vary from scheme to scheme and transfer to transfer. Schemes that have a history of making non-statutory transfers, or enhanced transfer value exercises, will need to consider this point further.
Bulk transfers on a mirror-image basis
If the transfer was a bulk transfer without member consent, under which the receiving scheme provided mirror image benefits, by contrast, there is no duty to top up. This is because different statutory provisions govern such transfers.
In this situation, the obligation to equalise GMPs moves with the transfer and becomes an obligation of the receiving scheme trustees. There may be some contractual warranties or indemnities that form part of the transfer, depending on the precise arrangements giving effect to the bulk transfer.
Can transfers more than six years ago be ignored if the scheme rules contain a forfeiture rule?
For most schemes, no. The judge took a narrower approach to the applicability of forfeiture rules than he did in the original judgment on GMP equalisation more generally.
We will provide a more detailed analysis of forfeiture, and what we have learned from the Lloyds judgments on the extent and limitations of forfeiture rules in pension schemes, shortly.
Should trustees proactively revisit past transfers, or just wait for any former members to come forward with claims?
Lloyds 3 did not provide clarity on this question. The judge did say that, as a minimum, the Lloyds trustees (and so this applies by extension to any trustees of other schemes in a similar position) should proactively reflect on the new obligations they now know they have.
The judge did also recognise, however, that the costs of seeking out former members could well be disproportionate to the top-up payments that would have to be made, but he did not draw from that any firm conclusions about the extent – and limits – of the duty to be proactive. The parties did not ask him to, because this was not an issue in the litigation.
This leaves trustees with something of a dilemma. The answer to the question of how proactive trustees will need to be will be scheme-specific, and is one for trustees to discuss with their advisers. It will be informed by:
- the practicality of investigating – if records are not available, trustees cannot do the impossible, but if information is readily accessible, trustees would be able to use it in order to correct the transfers that have been made;
- the extent to which any individuals are likely to be disadvantaged by inaction;
- the trustees' approach to risk and position on their journey towards an ultimate risk settlement – if a scheme is about to buy out and wind up, the trustees cannot allow known undischarged liabilities to continue to exist without doing something to address (or insure against) them;
- a legal analysis of the effect of not doing anything on the trustees' protection, whether under liability insurance policies or exoneration clauses in the scheme rules – if inactivity could prejudice these protections, trustees are more likely to need to take active steps.
One thing that is clear from Lloyds 3 is that doing nothing is not an option. The judge states:
"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."
To ensure that this determination of what to do is kept reasonable and proportionate, trustees will need to discuss the matter with their advisers and take account of past transfers as part of a wider project plan for GMP equalisation.
For our views on how to make GMP equalisation go away through efficient project planning, see 'GMP equalisation, - how to make it go away?'