GMP ruling implementation will be ‘Herculean’ task for schemes

In a judgment handed down on Friday, the High Court ruled that trustees committed a breach of duty if they did not equalise a member’s GMP benefits at the time of the cash equivalent transfer value.

Schemes that had contracting-out benefits will need to revisit their past transfers since the 1990s, with Mr Justice Morgan ruling that there is no time limit for this exercise.

At this point with the judgment having just been released, identifying, calculating and reuniting small sums for many former members spanning a near 30-year period is a very daunting task

David Brooks, Broadstone

The judgment could also cause further pain for defined benefit sponsors, while further legal clarity might be needed as the ruling does not cover all circumstances where a transfer occurred.

GMPs were created due to contracting out, which meant DB schemes could prevent their members tripling up on pension benefits by building up a basic state pension — state earnings-related pension scheme — and an earnings-related occupational pension. In exchange for giving up Serps, both employees and employers paid less national insurance contributions.

But as a consequence of the different treatment of men and women in state pensions being ruled discriminatory under EU law, in October 2018 the High Court ruled that Lloyds Bank scheme trustees must also equalise benefits between women and men who have GMPs.

The ruling was considered a solution for a pension problem spanning almost three decades, and schemes are now having to decide how to equalise the contracted-out benefits of their members.

However, questions remained over past pension transfers, which although part of the original application to the court, were not ruled on by judges. Lloyds trustees requested a second hearing in June 2019, which took place in May this year.

Samantha Brown, regional head of employment, pensions and incentives at Herbert Smith Freehills, said: “Once again, this ruling is likely to affect every DB scheme in the UK that provides GMPs accrued between May 17 1990 and April 5 1997.

“It means that trustees of such schemes are required to revisit CETV’s paid to former members and make a top-up payment where a member has not been paid their full entitlement.”

An ‘Herculean’ task for a few pounds result

David Brooks, technical director at Broadstone, argued that applying the ruling “is going be a Herculean administration challenge”.

He explained that following a transfer out it “was not uncommon for member data to be deleted (or at the very least in part), as digital filing space in the early 1990s was at a premium”.

“The major challenge for schemes that have made a transfer out will be determining the level of existing data, whether an additional payment is due, and then tracking down the member or receiving arrangement.”

According to analysis from Aon, only 25 per cent of members will be due a top-up. This will range “from a few pounds, to some extreme cases where the top-up could be tens of thousands of pounds”, said Tom Yorath, partner at the consultancy.

“The challenge facing the industry is identifying those who have been affected, as in many cases schemes simply will not hold the data to know whether the member had GMPs accrued from 1990 to 1997 — let alone how much the top-up is,” he added.

Mr Brooks agreed, adding that it will be a challenge to track down the individual, since the former member might have “drawn their pension benefits, possibly transferred again, having taken a lump sum or passed away”.

He said: “At this point with the judgment having just been released, identifying, calculating and reuniting small sums for many former members spanning a near 30-year period is a very daunting task.”

Accounting challenges for sponsors

One uncertainty caused by the new ruling is the possible impact on sponsors’ liabilities. When the first judgment came out in 2018, “companies generally had to increase their pension scheme liabilities linked to GMP equalisation, and generally that went through to profit and loss”, explained Matt Davis, head of GMP equalisation at Hymans Robertson.

“It’s likely that sponsors will have to increase what they are allowing for GMP equalisation to account for historic transfer values,” he argued, adding that those sponsors who report accounting figures under IAS 19, “the ruling is likely to trigger a need to assess extra accounting liabilities and the impact on [profit and loss]”, as the rules changed since the last Lloyds judgment.

Mr Yorath added that if companies need to account for the past transfers, “it could be a further dent in profits in what is already an extremely challenging year for many businesses”.

Uncertainties still remain on past transfers

In the 115-page ruling, Mr Justice Morgan made two exceptions to the need of rectifying past transactions, regarding to bulk transfers and individual ruled-based transfers.

Lynda Whitney, partner at Aon, explained that in the Lloyds case, only a relatively narrow range of types of bulk transfer — where a group of people moved from one scheme to another — were tested, since Lloyds had only done a small number of these transactions.

She said: “The area they tested was specific to bulk transfers where the benefits that were being granted were a mirror image of the ones being given up. What we don’t know is how this applies to other bulk transfers that haven’t been tested by the judge.”

The other exception applies to transfer clubs, which occur “in some industry-wide schemes where they have transferred between sections of the scheme”, she added.

The judgment also does not make any reference to bulk annuity transactions, such as buy-ins and buyouts.

Ms Whitney noted that scheme trustees will need to query their lawyers about their particular situation. “If it is not covered at all, then it will be for schemes to take legal advice regarding what they want to do about those situations, and ultimately it could end up taking a separate court case to cover areas that haven’t been covered by Lloyds because it hasn’t happened to Lloyds,” she said.