High court tells Trustees they must revisit past transfers

November 24, 2020

In another landmark judgment, given on Friday 20th November, Mr Justice Morgan told pension scheme trustees that they will need to revisit many past transfers out of their schemes made in the last 30 years – although possibly not in all circumstances.

The decision is the third High Court judgment given in litigation over GMP Equalisation in the pension schemes of Lloyds Banking Group. Throughout these cases, and in related inputs from HMRC, TPR and the DWP, the approach has been to confirm the strict need for schemes to correct sex-based inequalities that arose by providing a benefit that had been modelled by legislation.

Guaranteed minimum pensions (“GMPs”) accrued in pension schemes (mainly defined benefit-type schemes) that contracted-out of the State Earnings-Related Pension Scheme in the years between 1978 and 1997. During this time, a number of cases were heard in the European and UK Courts on the requirements to equalise benefits in pension schemes – effective from the time of the Barber decision in May 1990. In spite of this, legal uncertainties meant that few pension schemes had taken steps to work through the inequalities arising from GMPs. The first decision of Mr Justice Morgan in the Lloyds Banking Group litigation, confirming the need to equalise for GMPs, was only given in October 2018.

In the last two years, pension schemes have moved at different speeds to try addressing the practical and data issues in equalising for GMPs. Many are making progress, and are encouraged to do so by the Pensions Regulator, the Pensions Minister and advisers in the industry. It’s recognised that scheme members need their benefits correcting and, whilst there is no “typical” case, some individuals could see significant additional payments.

Last week’s judgment looked at the position of former scheme members, being those who had transferred their benefits out of a pension scheme. Where this was an individual statutory transfer (and potentially in some, but not all, bulk transfer arrangements), the judge’s analysis of the laws governing that transfer process led him to the conclusion that trustees had not fulfilled their legal duties if they had not made such transfers with allowance for GMP equalisation. That meant trustees retain an obligation to complete the transfer, by paying any top-up necessary to represent GMP equalisation.

Some bulk transfers of multiple members may have complied with all legal requirements and do not give rise to further equalisation actions for the transferring trustees. Legal advice will be needed for both the transferring and receiving schemes to verify the position and understand where equalisation obligations lie.

Some individual transfers, made on a non-statutory basis, may have provided a discharge to trustees. The effectiveness of this will depend upon the precise wording of the scheme rules and the discharge. Again, legal advice will be needed to clarify the position.

In practice, trustees of schemes that have paid out transfers in the past (which will be most schemes that were contracted-out on a defined benefit basis) will need to decide how they can and will proceed in practice. Will they be proactive, or reactive? Doing nothing is not going to resolve matters.

Practically, equalising historic transfers is unlikely to be straightforward for trustees. They will need to obtain (and pay for) further calculations, in some cases checking the files of members who left their schemes many years ago – assuming those files have been retained. The judge did not give a clear steer on how this should be done – he felt that schemes could work out many elements of a solution between themselves. However, it feels likely that the industry may need to agree a convention in order to support the resolution of cases.

This may not be the end of litigation on the issues arising from GMP equalisation. Some difficult issues remain for schemes to navigate, including:

What can trustees do if the member transferred to a scam arrangement, or does not want a top-up to go to the original recipient scheme?
Do trustees still have access to historic information about all transfers? Detailed terms of the transfer calculation and discharge could be very important and should be analysed.
Where recipient schemes have wound up, or transferred to the Pension Protection Fund, agreement will be needed with the parties now responsible for paying the transferred benefits.
What about members who will not engage with trustees about a top-up? The judge indicated that they would need to make a claim but didn’t restrict the time for such action – trustees will be left waiting in uncertainty. Claims may relate to transfers paid out up to 30 years ago.
Will recipient schemes accept a transfer? They may be encouraged to do so by the existing legal position (from the ECJ case of Coloroll) that receiving schemes are liable to equalise the liabilities they hold, but will they seek to charge a member for administering this?
What about former members that have died? Can the trustees expect a claim from their relatives?
The date of transfer may be important, as the laws governing transfers have developed over the past thirty years – not all will be subject to identical legal requirements.
If a top-up isn’t paid, what benefit or liability does the transferring scheme retain? The judge did not view it as being a trivial or small lump sum benefit, payable to a member direct. If it has to be held in a scheme as a defined contribution entitlement (and it does have to include an allowance for interest, although not for investment return), does that require the trustees to comply with DC governance requirements when they otherwise wouldn’t have to?
Even if trustees and recipient schemes agree an equalisation adjustment that’s different from a top-up, will the trustees be effectively discharged from their statutory transfer duties?
Will a recipient scheme need its rules amending, in order to accept transfer top-up?
Trustees’ obligations aren’t dependant on members making claims, but to deal with this matter Trustees don’t need to seek agreement of their scheme employer or a court to progress paying out equalised top-ups. For underfunded schemes, it is not clear how far a project to make top-up payments may impact upon the security of remaining members’ benefits.

There will no doubt be many more issues for schemes to deal with. In addition, the principles that Mr Justice Morgan explained in detail in his judgment could be applied equally to other past transfers with deficiencies (even where unknown), which could provide further concerns.