UK Pensions – High Court decides trustees must top-up past transfer payments for GMP equalisation
The High Court has handed down its latest decision in the Lloyds case, ruling that trustees must top-up past transfer payments that failed to take account of the obligation to equalise for GMPs. As a result, trustees will need to expand their GMP equalisation projects to include top-up payments in respect of transfers-out going back to 17 May 1990. This will add to the already significant administrative burden of implementing GMP equalisation, but provides welcome certainty in relation to this remaining piece of the GMP equalisation puzzle.
In the first Lloyds decision handed down in 2018, the High Court ruled that trustees must equalise total benefits for men and women to offset any differences arising from unequal guaranteed minimum pensions (GMPs). Since then, trustees have been progressing their GMP equalisation projects, with some at a more advanced stage than others.
One outstanding issue related to the extent of trustees’ obligation to revisit past transfers-out. As a further Court decision was awaited in relation to this question, most schemes chose not to take any action in relation to transfer values already paid before the date of the first Lloyds judgment. What has the Court decided? In a nutshell, the Court has decided that:
- Trustees are liable to top-up transfer payments that failed to take account of the obligation to equalise for GMPs in cases where the transfer was made under the cash equivalent transfer value (CETV) legislation.
- Trustees are not discharged from that liability by any statutory provision or any scheme rule or by any form of discharge signed by the transferring member.
- The top-up payment should be calculated as at the date of the original transfer and then increased by interest at 1% above the base rate.
- No statutory limitation period applies and no limitation period under the scheme rules considered in the case applied either. This aspect of the decision is potentially subject to individual scheme rules, but it is likely that most forfeiture rules won’t apply to transfer payments.
The decision that trustees are liable to top-up past transfer payments is in line with expectations, although it will come as an unwelcome surprise to many schemes that they will, as a starting point, need to consider all transfers-out going back to 17 May 1990. However, the judgment leaves open the possibility that, after taking account of the costs and practicalities, trustees might reasonably decide to review past cases only if specifically asked to do so.
The decision that the top-up should be calculated as at the date of the original transfer and then increased by interest is perhaps more surprising. Nonetheless, this is a helpful and pragmatic outcome for schemes, as it will make the calculations more straightforward. Where a top-up is due, it should in principle be paid to the scheme to which the transfer payment was originally paid. The Court didn’t consider cases where the transferring member has subsequently transferred out of the receiving scheme or otherwise ceased to be a member of that scheme, so trustees will need to consider how to proceed in these cases. It may, for example, be possible to discharge the liability to pay the top-up by making a payment directly to the member. Indeed, a payment to the member may be possible in any case if the member agrees and the payment would be authorised for tax purposes.
What should trustees do now?
Trustees should now review past transfer payments that failed to take account of the obligation to equalise for GMPs in cases where the transfer was made under the CETV legislation.
In cases where the transfer wasn’t made under the CETV legislation, for example, in the case of bulk transfers or individual transfers paid in accordance with the scheme rules, the position is likely to depend on the relevant scheme rules and (in the case of a bulk transfer) on the transfer agreement between the schemes concerned and any agreement between the sponsoring employers. Trustees will need to consider this on a case-by-case basis.
Finally, it is worth noting the wider application of this decision: the same principles will apply in other cases where trustees have wrongly calculated a transfer payment, whether as a result of a misreading of the scheme rules or a mistake as to the relevant facts or by reason of a mathematical error.
For more information, please speak to your usual Linklaters contact.