Updated: DB schemes that provide GMPs must revisit and top-up historic CETVs ‘where necessary’

Holly Roach

Defined benefit (DB) schemes that provide GMPs must revisit and, where necessary, top-up historic cash equivalent transfer values (CETVs) that have been calculated on an unequal basis, a landmark court judgment said last week.

It also stated that trustees that did not calculate a GMP when making the transfer may have “committed a breach of duty” if they made an “inadequate” payment.

The judgment in the second instalment of the GMP equalisation litigation involving Lloyds Banking Group’s DB pension schemes was handed down on Friday (20 November) following a court hearing back in May and two additional court hearing days in October on the question of past transfers-out.

Justice Morgan also held that the trustees of Lloyds’ schemes are not discharged from the need to top-up historic CETV payments by any statutory provision, any rule of the schemes or by any agreement with the transferring member.

At the same time, he noted that the trustees’ duty to correct inadequate transfers is not time barred or forfeited, either under the rules of the Lloyds’ schemes or under the Limitation Act 1980.

There is no statute of limitation on a member seeking compensation from their ceding scheme if a GMP was not calculated when making the transfer, but the member must bring the claim forward. A question may be raised here as to how many will actually do this.

But, the trustee also has the option to meet this duty without a court order.

Legal view

Herbert Smith Freehills regional head of employment, pensions and incentives Samantha Brown said: “This is another landmark ruling which extends the scope of schemes’ GMP equalisation exercises.

“Once again, this ruling is likely to affect every DB scheme in the UK that provides GMPs accrued between 17 May 1990 and 5 April 1997. It means that trustees of such schemes are required to revisit cash equivalent transfer values paid to former members and make a top-up payment where a member has not been paid their full entitlement.

“Trustees of affected schemes should already be taking steps to equalise the benefits of male and female members who are still in their scheme, following the ruling in the first judgment. These GMP equalisation projects will now need to be extended to include historic cash equivalent transfer payments.”

She added: “The fact that trustees cannot rely upon any statutory, rule-based or contractual discharge and that claims are not time-barred could have much wider implications, and not just for schemes dealing with GMP equalisation, as it means that trustees may not benefit from any kind of discharge or limitation defence in other circumstances where transfers turn out to have been calculated incorrectly.”

Pinsent Masons partner and GMP equalisation lead Stephen Scholefield said: “Today’s judgment will provide both welcome clarity and practical challenges to the industry on a transferring trustee’s duty around historic transfers as a result of GMP equalisation.

“Following the 2018 judgment, many trustees and employers will have begun their GMP equalisation journey and will now need to factor these latest changes into those projects. The decision is far reaching, spanning wider than just GMP equalisation and potentially affecting rectification projects in general. It seems clear that the Judge has left a number of areas open in order to give trustees some flexibility given the time, data and administrative challenges.”

He continued: “As ever, the devil is in the detail and the judgment will need to be carefully considered before changes are implemented – there’s a lot to it.”

Taylor Wessing senior professional support lawyer Angela Sharma noted: ‘Trustees will not have been waiting for the outcome of this decision to progress GMP equalisation exercises and indeed should be doing so in earnest. However, the finding that trustees must address past inadequate transfer payments made under the cash equivalent legislation is likely to add a significant financial and administrative burden to those exercises – especially so given the finding that those claims are not time barred under statute.

“The decision also gives rise to lots of difficult practical issues. What about finding all the necessary data (e.g. generally speaking schemes are only required to keep transfer payment records under the scheme administration regulations for a minimum of 6 years, so many schemes may simply not have enough information to correct the transfer payments).

“Schemes looking to buy out will also have particularly tricky issues – what if schemes they have received transfers from are not ready to equalise and what if they don’t have time to fix the transfers they have made?”

She urged such schemes to “seek advice urgently”.

Gowling WLG pensions partner Chris Stiles said: “The latest Lloyds judgment puts an additional (if not entirely unexpected) burden on pension scheme trustees and employers in relation to GMP equalisation. Revisiting transfer values, potentially as far back as 1990, may or may not make a material difference to liabilities, but it will certainly create costs in terms of administration, time and the need for professional advice.

“Schemes and their advisers will need to consider the implications of the 115-page judgment carefully to find the most pragmatic way to deal with the potentially undischarged liabilities to members whom they had thought had fully transferred all their benefits out of the scheme.”

Significant challenge for schemes

Dalriada Trustees professional trustee Adrian Kennett said: “Trustees who thought they were protected by discharge forms signed by members who transferred out now learn that they largely are not. They will now need to go hunting for data to recalculate transfers out of schemes as far back as 1990.

“It is yet another painful day in the subject of GMP equalisation – administration systems and processes are going to be really put to the test.”

Hymans Robertson head of GMP Matt Davis added: “This ruling addresses the thorny issue of pension schemes picking up the tab for GMP equalisation for past transfer values. This should be good news for some of those who took a transfer value as they may now be in line for a top up payment.

“However, the effort involved in revisiting transfers paid out by pension schemes across the industry over the last 30 years will be a very significant challenge for schemes, and in many cases historical data will not be available.

“For sponsors of pension schemes who report accounting figures under IAS19 the ruling is likely to trigger a need to assess extra accounting liabilities and the impact on P&L. For those due to report as at 31 December 2020 the timing of the ruling doesn’t leave much time to analyse this.”

Aon partner Tom Yorath, who acted as an expert witness in the case said: “The challenge facing the industry is identifying those who have been affected, as in many cases schemes simply will not hold the data to know whether the member had GMPs accrued from 1990 to 1997 – let alone how much the top-up is.

“The limited data on historic transfers means that even trying to make a ball-park estimate of the liability impact is likely to be a challenge for most schemes. This is particularly a challenge for scheme sponsors, many of which will recall the way that GMP equalisation costs hit company profits back in 2018. It is not yet clear whether auditors will again require equalisation of transfers to be accounted for through the P&L. But if this is so, it could be a further dent in profits in what is already an extremely challenging year for many businesses.”

Aon partner Lynda Whitney added: “Even if a top-up can be calculated – which may need to be based on calculations and conditions from up to three decades ago – there is no guarantee that the receiving scheme is still in existence, or that the member has not transferred again.

“The size of the task of equalising three decades of transfers is enormous, and many schemes will be looking for pragmatic ways to limit the scope of the exercise. Helpfully, the ruling provides some limited carve outs for bulk transfers that are done on a mirror image basis and also for some transfers that have taken place under scheme rules – this may provide a glimmer of hope for transfer clubs.”