Judgment in latest Lloyds case provides some clarification of trustees' obligations in relation to transferred-out benefits
Judgment in the supplementary Lloyds Bank case was handed down on 20 November 2020, providing some clarification as to the actions which must be taken by trustees of defined benefit pension schemes to address unequal guaranteed minimum pensions (GMP) where that GMP was transferred between occupational pension schemes.
The decision follows the original Lloyds judgment in 2018 which confirmed that GMP benefits must be equalised, and provided details of acceptable methods of doing so. The 2018 judgment also confirmed that schemes which had received transfers-in of unequalised benefits are required to take action to equalise those transferred-in benefits. One question which remained outstanding following the 2018 judgment was whether transferring schemes were also required to equalise transferred-out benefits.
Key elements of the decision
- Trustees of transferring schemes are required to take pro-active steps to top up payments made where a (former) member has transferred out under the statutory cash equivalent transfer mechanism. Transferring scheme trustees do not receive a statutory discharge from their obligation to pay the full equalised cash equivalent (and in the case of the Lloyds schemes the rules and the discharge forms signed by transferring members did not assist)
- For individual transfers which are not statutory cash equivalent transfers (referred to in the judgment as "individual rules-based transfers"), the question of whether the transferring trustees have discharged their liability to transferring members will depend on the transferring scheme rules:
- In the case of the Lloyds schemes, there was nothing to suggest that the trustees had failed to validly exercise their power to pay a transfer value, and they consequently did not have to take any further action to equalise the transferred-out benefits
- However, a member could potentially successfully challenge the trustees' decision on the basis that the decision to pay the unequalised transfer value was a breach of trust. In the event of a successful challenge, the trustees would have to revisit the transfer value.
- The judge ruled that the Lloyds trustees were not required to top up any bulk transfers where the receiving scheme provided the same benefits and certain legislative safeguards were met. It will be important (despite perhaps being time consuming) for trustees to consider historic bulk transfer payments made to other defined benefit occupational pension schemes since May 1990 to establish whether (a) the receiving scheme offered the same benefits and (b) whether the specific legislative requirements set out in Lloyds were met in respect of those historic transfers. If it remains questionable whether transferring trustees have a liability to top-up, it may be necessary to consider any indemnities provided in any associated sale and purchase agreement
- Equalisation of unequalised cash equivalent transfers should be by way of a top-up payment to the receiving scheme (not by providing a residual benefit in the transferring scheme). The top-up payment should be calculated in line with the cash equivalent transfer legislation, with interest of 1% above the bank base rate applied for the period between the original transfer and the top-up payment
- The judge clarified that – in relation to cash equivalent transfers – both the transferring scheme trustees and the receiving scheme trustees are under an obligation to equalise. He did not see this as creating a double-recovery situation; instead, his view was that top-up paid by the transferring trustees would help the receiving trustees to equalise the benefits under the receiving scheme
- There is no statutory limitation period which would remove the obligation to top-up cash equivalent transfer values after a certain time. There could potentially be a cut-off date under a scheme's rules, but the five forfeiture provisions considered by the judge (the same provisions he had analysed in the 2018 Lloyds decision) did not operate to prevent a member from requiring the Trustees to pay a top-up transfer payment
- In some cases, transfers out will have consisted of the non-GMP element of a member's benefit, while the GMP was retained in the transferring scheme (for example, where the transfer was being made to a scheme which had never been contracted out). Where there has been a partial transfer out of this nature, the judge's view was that a top-up to the receiving scheme will be sufficient to equalise the member's overall benefit, and that no further action is needed in order to equalise the GMP remaining in the transferring scheme.
What questions are still unanswered?
Although the judgment provides some clarification, there are plenty of issues which are still unresolved, either because they were not considered at all in relation to the Lloyds schemes or because the judge chose not to make a decision on questions where it would be difficult to set out a general approach for the pensions industry:
- There was no clarity provided as to what actions transferring trustees can take to equalise the transfer values of members who have left the receiving scheme, or where the receiving scheme is unwilling or unable to accept a top-up payment
- The judge did not make any decision as to whether it would be possible to resolve this issue by paying the top-up amount direct to the member in question rather than into a receiving scheme
- While the judge made some comments in relation to when and how a "claim" for equalised benefits would be made, these were in the context of transfer values and do not provide any clarification of the wider questions relating to claims for top-ups to pensions already paid
- There was no ruling on the liability of transferring trustees in respect of bulk transfers to schemes that provide "broadly comparable" as opposed to identical benefits.
What does this mean for trustees of schemes which had GMP?
Trustees should be proactive in taking action to top up cash equivalent transfer values which have been paid in the past on an unequalised basis.
In tandem with this, though, trustees may wish to review:
- the forms signed by transferring members, in case they contain anything which could provide the trustees with a discharge of their obligations in respect of cash equivalent transfer values; and/or
- the scheme's forfeiture provisions, in case they are drafted differently from the forfeiture provisions reviewed in the Lloyds judgment and provide some limitation on their liability.
In relation to historic bulk transfers, further clarification is unlikely unless and until a future case is heard on this point. We recommend that trustees review the data and legal documentation relating to any historic bulk transfers out and take advice from their legal advisers as to how to proceed.
Similarly, we recommend that trustees consider how to move forward in relation to the other unanswered questions – in particular how to resolve situations where it is not possible to pay a top-up into the receiving scheme – as it is unlikely that there will be any further clarification on those points unless and until there are future court hearings.
In relation to individual rules-based transfers out, trustees should review their scheme rules to identify whether they have been discharged from their obligations. This will involve looking at all versions of the relevant rules, if there have been changes since 1990.
Separately, trustees will already be aware of their obligation to equalise benefits which have previously transferred into their scheme. In light of this judgment, we recommend that trustees get in touch with the schemes from which those benefits transferred (if possible), to identify what actions those transferring schemes will now be taking to top up transfer values. This should give trustees of receiving schemes a clearer idea of what, if any, top-ups they can expect from transferring schemes.