GMP equalisation: pension providers should check product terms

Out-Law Analysis | 28 Apr 2021 | 3:38 pm | 2 min. read

Pension providers will not usually have to adjust benefits payable from their products to account for guaranteed minimum pension (GMP) equalisation – but should check terms carefully in case they agreed to anything different at the time of the transfer.

It is unlikely that the Lloyds decision on GMP equalisation will lead to a direct requirement on providers to increase benefits in payment from their policies where those policies accepted a transfer from a contracted out occupational pension scheme. Providers should, however, use this opportunity to review terms and conditions and communicate with policyholders – not least because of their obligations to consider the information needs of customers and ensure that they are treated fairly under the Financial Conduct Authority (FCA) Principles of Business.

Providers’ obligations to historic customers

Following the original judgment in its long-running GMP equalisation case, Lloyd’s Banking Group went back to court to ask further ‘consequential’ questions on their obligations in respect of historic transfers out of their schemes.

The judgment, in broad terms, confirmed that the LBG schemes as transferring schemes were required to make a top-up payment to make good transfers out since 17 May 1990, when the law on equal pensions changed, and that the usual six-year limitation period on compensation claims did not apply. The judge also confirmed the LBG schemes were not liable as transferring schemes in respect of certain bulk transfers, provided that the relevant actuarial certificates were valid.

Kemp Michael

Michael Kemp

Senior Pensions Technician

Whether providers have any obligations to equalise benefits to account for the inequality in GMP legislation will depend to a large extent on the contractual terms and conditions of their policies

The judgment helped to provide clarity for trustees of occupational pension schemes in respect of their obligations on transfers to other occupational pension schemes. However, it did not provide much in the way of general guidance for trustees or providers where transfers were made to individual or bulk buy-out policies, or to other personal pension arrangements.

The law on GMP equalisation is incredibly complex, and the lack of consideration by the court of providers’ obligations in these circumstances is not ideal as it does not provide them with certainty. On face value, however, the position that providers are in has not changed: whether they have any obligations to equalise benefits to account for the inequality in GMP legislation will depend to a large extent on the contractual terms and conditions of their policies, and any additional contractual promises made to transferring trustees or employers.

Where the receiving vehicle is a section 32 buy-out policy (or deferred annuity policy), the terms are likely to contain an obligation to provide the customer with benefits at least equal to their GMP entitlement under the ceding scheme. Inclusion of this provision means that the ceding scheme trustees could receive a statutory discharge in respect of GMP rights.

Importantly, the Lloyds judgments make clear that the equalisation required in respect of GMPs is not an adjustment to the GMP itself – the calculation of which is defined by statute – but rather an adjustment to the excess over GMPs. It would therefore seem to be the case that the obligation in section 32 policies is unlikely to require providers to adjust the benefits they are paying as a result of GMP equalisation requirements, in the absence of any further contractual promise.

What should providers do now?

Although it is unlikely that the Lloyds decision will lead to a direct requirement on providers to increase benefits in payment from their policies, there remain a number of areas for them to consider, underpinned by their obligations under the FCA’s Principles of Business.

Providers should review the terms and conditions of their products and any additional contractual promises they have made. They should also be thinking about whether, when and how to communicate with customers, where the customer may have an ongoing right to a top-up from a previous scheme as a result of GMP equalisation. Providers should also consider their approach to the potential receipt of top-up payments from ceding schemes: whether they are willing to accept any top-up payments; whether a de minimis limit would be appropriate and how this might be set; and how any top-up payments will feed through to benefit increases for customers.