GMP equalisation: High Court rules on past transfers

The latest piece of the GMP equalisation jigsaw was handed down by the High Court on 20 November 2020, as part of the long-standing litigation relating to Lloyds Banking Group’s pension schemes.

The judgment is significant as it will impact the vast majority of UK defined benefit pension schemes which provide GMPs accrued between 17 May 1990 and 5 April 1997.

What did the High Court decide?

After nearly three decades of uncertainty, the High Court ruled in October 2018 that pension scheme trustees were required to equalise Guaranteed Minimum Pensions (GMPs) for male and female members. However, until last week there was uncertainty on whether the obligation to equalise applied to cases where trustees had transferred members’ benefits out to another pension arrangement.

The effect of Mr Justice Morgan’s judgment is that schemes providing GMPs will need to revisit and, where necessary, top-up historic cash equivalent transfer values paid out of the scheme that were calculated on an unequal basis. In his view, trustees 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. This is the case even though, at the time those transfers were made, there was no binding legal authority requiring them to do so.

However, the position is different in relation to non-statutory transfers (such as post-normal retirement date transfers permitted under a scheme’s rules). In these cases, a member would need to demonstrate that the trustees had breached their wider duties before an order would be made requiring a top-up to be made. Further, provided the preservation requirements were duly met and there were no wider breaches of duty, transferring scheme trustees will not have any liability to take remedial action in respect of past bulk transfers-out.

What does this mean in practice for trustees?

Whilst the judgment does not expressly state that trustees need to be proactive in identifying cases where top-ups will be required, equally it is clear that doing nothing is unlikely to be an option. There is no prescriptive method for trustees to deal with the matter.

Trustees will need to work with scheme administrators to review past individual cash equivalent transfers to determine whether top-up payments are required to be made. Mr Justice Morgan was clear that trustees could not instead simply offer to provide a residual benefit from their current scheme, stating that:

“The Trustee had a duty to calculate the cash equivalent correctly, it broke that duty and it can now be ordered to make a top-up payment.”

Interest of 1% above base rate should be applied by trustees to top-up payments.

How far back must trustees look?

The judgment is clear that trustees cannot rely on a time bar, whether under their scheme’s rules or under the Limitation Act 1980, to resist the claim of members to top-up payments. This means that trustees will potentially need to revisit past cash equivalent transfers going back to the early 1990s. This is likely to present a number of practical challenges for schemes, many of whom will have either incomplete or, in some cases, no records remaining of transfers going that far back.

Does this apply to all cash equivalent transfers which included GMPs?

Yes. The obligation is not limited to such transfers made to occupational defined benefit pension schemes; it will also include past transfers to occupational defined contribution, personal and overseas pension schemes.

What about past member discharges – are they still effective?

Not completely. The judgment is clear that trustees cannot rely upon any statutory, rule-based or contractual discharge to remove them from liability to make a top-up payment where one is required. Trustees have historically relied on discharges being provided by members or from receiving schemes to protect them against future liability in respect of transfers made. However, these will not be effective to relieve them of their obligation to make top-up payments.

What should trustees and sponsoring employers do next?

Immediate actions for trustees include:

• convening a meeting of the trustee board (and/or a GMP equalisation sub-committee) as soon as possible to consider the impact of the judgment on their current GMP equalisation project plans;
• reviewing past transfers in/out of the scheme and taking professional advice on the technical and practical aspects of implementing any necessary adjustments; and
• keeping abreast of future commentary and guidance (such as from the Government and/or HMRC) on how to deal with these requirements in practice.

Immediate actions for sponsoring employers include:

• opening a close dialogue with scheme trustees as soon as possible to determine how the judgment will impact their scheme(s) specifically; and
• liaising with the company’s auditors to determine whether they will require any additional liabilities related to top-up payments to be accounted for in the company’s P&L. 

To some extent the judgment does not come as a major surprise, given that the High Court judgment in 2018 was clear that the obligation to equalise GMPs went all the way back to May 1990. However, complying with the judgment will present significant practical challenges for trustees to overcome. Many schemes simply will not have records going back as far as required. In those cases, trustees may be vulnerable to claims from members coming out of the woodwork. Also, in many cases the receiving scheme will still not be in existence to receive a top-up payment; it is not clear what trustees should do in that situation.

Whilst the obligation to revisit past cash equivalent transfers falls primarily on trustees, in practice much of the work will need to be undertaken by scheme administrators. This will place a significant additional workload on those providers, many of whom are already working close to full capacity. Trustees will need to bear this in mind and factor this into their project timetables.

There are still some areas where further clarity would be desirable in relation to GMP equalisation, such as in relation to GMP conversion and its tax treatment. However, it is equally clear that the courts, the Government and HMRC now expect trustees to grasp the nettle and put in place a clear plan to deal with the requirement to equalise GMPs. Many scheme trustees are well underway with their equalisation projects, but this will now need to be extended to deal with the issues relating to past transfers.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.