The first decision in the Lloyds Banking Group case was handed down in October 2018 and held that trustees of DB occupational pension schemes must equalise pension benefits for male and female members for GMPs accrued between 17 May 1990 and 5 April 1997.
The latest instalment of the case was in relation to historic transfer payments out of the scheme where the transferring trustee had not equalised benefits in relation to GMPs, which resulted in transfer payments being less than they should have been.
Transfers out under the cash equivalent legislation
The Court held that where a scheme had made a transfer under the cash equivalent legislation, which did not reflect the member's right to equalised benefits, the transferring trustee remains liable to make a correctly calculated top-up payment to the member. The transferring trustee is not discharged from that liability by any statutory provision, any rule of the scheme or by any agreement with the transferring member.
The transferring member may seek a remedy against the transferring trustee by obtaining an order from the Court that the transferring trustee pay the correct transfer payment. Such a claim is not time barred, either under the rules of the scheme or the Limitation Act 1980. The transferring trustee is able to pay the correct transfer payment without an order of the Court.
The transferring trustee must make a top-up transfer payment and is not able to require a member to accept a residual benefit. However, the Court held that the transferring trustee and member could agree an alternative remedy.
Any top-up payment should bear interest at 1% above the base rate.
Bulk transfers under the preservation of benefit legislation
In relation to mirror-image bulk transfers between DB schemes, the Court held that where the transfer was made in accordance with the preservation of benefit legislation and the rules of the transferring scheme, a transferring member is entitled to benefits under the receiving scheme and has no claim against the transferring scheme. Therefore, the receiving scheme will likely be liable for dealing with GMP equalisation.
Individual rule-based transfers
In relation to individual rule-based transfers, the Court held that where the transfer was made in accordance with the preservation legislation and the rules of the transferring scheme, a transferring member no longer has rights under the transferring scheme. The transferring member can ask the Court to set aside the exercise of the power if the transferring trustee had committed a breach of duty when exercising its power to transfer the benefits.
Whether the transferring trustee committed a breach of duty would require an investigation of the relevant circumstances and will be decided on a case-by-case basis. In the absence of such a breach, the receiving scheme will likely be liable for dealing with GMP equalisation.
Next Steps for Trustees
Following the first Lloyds Banking Group case, trustees should be in the process of implementing a strategy for dealing with outstanding GMP issues. The most recent judgment affects every DB scheme which accrued GMPs between 17 May 1990 and 5 April 1997 and means that those schemes will have an additional administrative burden of revisiting transfers paid out of the scheme over the past 30 years.
The Court held that, in relation to cash equivalent transfers, trustees cannot simply wait for members to make top-up requests, they need to be proactive in considering their obligations, the remedies available to members and the absence of a time bar on member claims, and then determine what to do.
Trustees will need to review the data available to them, establish whether a top-up payment is required, track down the former member and/or receiving scheme and make a top-up payment.
The amount due to transferring members will vary in each case, but could be between a few pounds to hundreds of pounds per member. In any event, there is a risk that the professional costs of dealing with the effects of this judgment could outweigh the benefits to members.
The obligations imposed on the transferring trustee do not alter the obligations of the receiving trustee to provide equalised benefits. The Court confirmed that they are concurrent obligations in that if the transferring trustee makes the top-up payment to the receiving trustee, the receiving trustee can add that payment to the scheme assets to assist it in performing its obligation to equalise benefits of that member under the receiving scheme. However, it remains to be seen whether the industry develops a working practice that the receiving scheme trustees are expected, for administrative convenience, to make claims on behalf of all of their members.
Finally, whilst the judgment gives some clarity on historic transfers out and how they should be dealt with by trustees, it does not deal with every potential scenario. Therefore, trustees should take legal and actuarial advice regarding historic transfers out of their scheme.
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