Court rules pension trustees must equalise GMP transfer values

Out-Law News | 25 Nov 2020 | 11:17 am | 4 min. read

In a second landmark judgment, the High Court in England has confirmed that pension scheme trustees must revise and equalise the values of historic transfers out of guaranteed minimum pensions (GMP) to ensure there are no gender-based differences.

The case was brought by the trustee of three of the Lloyds Bank pension schemes, which sought a ruling from the court in response to claims from a number of female members of the schemes.

GMPs are benefits that schemes must provide to employees who were contracted out of the state earnings-related pension scheme between 1978 and 1997.

In 2018 Mr Justice Morgan said trustees had a legal duty to amend pension schemes to equalise benefits for male and female members where the discrepancy is as a result of GMPs earned after 17 May 1990, despite the lack of government action and UK legislation on the issue. The judge held that the trustees’ obligation arose from EU law and a 1990 ruling by the Court of Justice of the European Union on equal rights to pensions.

In that initial hearing, the judge asked the parties to come back to court in relation to the trustees’ obligations to equalise historic transfer payments to a variety of other pension schemes to correct for any gender-based differences as a result of GMPs, and how any corrective action should be made.

Ruling on these issues, the judge said transfers made under ‘cash-equivalent’ legislation – which entitles scheme members to receive the cash equivalent of accrued benefits – should be equalised.

The court said the trustee owed a duty to transferring members to make a transfer payment which was correctly calculated and which reflected the member's right to equalised benefits. It said the trustee had in some cases made an inadequate transfer and therefore breached members’ rights, and remained liable to affected members for the breach of duty.

Members affected by this are entitled to ask the court for an order to force trustees to belatedly pay the correct transfer value, although trustees can also equalise transfer payments without a court order. Unlike in the 2018 judgment claims on this basis are not time-barred and discharge forms are also unlikely to defeat member claims.

Pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law, said the decision would lead to significant data and administration challenges for trustees having to revisit past transfers.

“However, there was also pragmatism in the judgment with the door left open for trustees and members to agree some other form of settlement, such as where there are practical difficulties in making a top-up transfer payment,” Scholefield said.

Scholefield said a key issue for trustees is just how proactive they need to be about correcting transfer payments in the absence of member claims.

“While the judge was clear that trustees must consider the position and decide what to do, he did not specify what their decision should be – although he noted that a court would usually be expected to say that the trustees should deal with the problem. What that means in practice, and the extent of the steps trustees need to take, will need to considered,” Scholefield said.

For individual transfers outside the 'cash equivalent' legislation, typically transfers made close to retirement or under employer or trustee-sponsored transfer exercises, the judge took a different approach. These remain valid unless the member seeks to have them set aside because the trustees breached their duties when making the calculation.

In the case of bulk transfers to other schemes that provided 'mirror image' benefits in the new schemes, the judge said if the legislation was complied with and the bulk transfer was in accordance with the rules of the transferring scheme, members were no longer entitled to benefits under the transferring scheme. He did not address bulk transfers that were not on a mirror image basis, leaving a further area for trustees to seek advice or guidance from the courts.

“The 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,” Scholefield said.

“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 benefit rectification projects in general,” Scholefield said.

“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. Those practical realities, along with the desire for legal and financial certainty and administrative efficiency, will be likely to guide trustees' thoughts on how proactive they should be about revisiting past transfers. In the meantime, we wait to see whether former members are encouraged to make claims – given the financial environment even relatively small payments may be welcome,” Scholefield said.

Scholefield said avoiding the need to revisit mirror image bulk transfers would provide some relief, but for other bulk transfers it would be necessary to consider their terms to see how legal responsibility sits across the transferring and receiving schemes, as well as how the judgment affected schemes that had been bought out and subsequently wound up.

Jenny Chambers of Pinsent Masons, who advised Lloyds Bank in the case, said: “Distinguishing between 'cash equivalent' and other individual transfers will require careful thought. Some schemes may find it difficult to identify between the two due to data held. It may also be hard to explain the different treatment to those who transferred and who may have been unaware of precisely what transfer rights they were exercising, or that there was any difference between the two."

“The flexibility to agree other forms of settlement with members, such as lump sum payments where consistent with the authorised payment tax regime, and for trustees to determine how they discharge their obligations in line with the judgment, could reduce implementation costs and practical headaches for the benefit of all concerned,” Chambers said.

“As trustees get ready to work though these issues, corporates need to think about the potential impact on their accounting disclosures, as well as their funding obligations. As ever, the devil is in the detail and the judgment will need to be carefully considered before changes are made – there's a lot to it,” Scholefield said.