PASA updates GMP guidance in light of Lloyds 2020 judgment

Though the Lloyds judgment has provided some much-needed clarity, PASA warned that a number of uncertainties remain that, because of the associated costs and the relatively small sums involved for members, may never be settled by the courts.

The Lloyds 2020 judgment concluded that contracted-out, salary-related schemes that paid statutory cash equivalent transfer values during the GMP equalisation period could be required to top up those payments.

It quickly became apparent to us Lloyds 2020 leaves many issues unanswered for both schemes which have paid transfer values and those which received them

Duncan Buchanan, PASA

“A top-up payment would be required to the extent the transfer value actually paid would’ve been higher at the time of payment had the value of the member’s benefits and the mix during the equalisation period between GMP and excess been that of a comparator of the opposite sex,” PASA’s updated guidance explains.

The type of receiving plan is immaterial when determining whether a top-up payment is required, as it might also be in the case of statutory and non-statutory individual transfer values.

“Transferring schemes which paid transfers to receiving plans where the GMP was retained in the transferring scheme (for example because the receiving plan wasn’t contracted out), will need to determine whether a top-up payment would be due,” the guidance states. 

Schemes remain ‘in the foothills’ of GMP equalisation

There is no limitation period for transfers out, and the Lloyds judgment determined that the wording of forfeiture rules and member discharges did not apply. 

“This means all past individual transfers out which covered periods of pensionable service in the equalisation period are potentially in scope for a top-up payment,” the guidance states, while noting that transferring schemes may wish to seek legal advice for their specific cases.

The Lloyds 2020 judgment also specified that trustees must be proactive in addressing historical transfer values, though PASA’s guidance adds that the judgment “also appears to permit trustees to think about factors such as cost of calculation, data issues and other practicalities when determining how to implement a correction process”, acknowledging that a number of “practical hurdles” remain.

Duncan Buchanan, chair of PASA’s methodology subgroup, said: “We always knew our original guidance on methods would need updating once the Lloyds 2020 judgment was issued. It quickly became apparent to us that Lloyds 2020 leaves many issues unanswered for both schemes which have paid transfer values and those which received them.

“It’s nearly three years since the first judgment in Lloyds and most schemes remain at the foothills of their GMP equalisation projects, gathering data to prepare for the task ahead,” he continued. 

“A few schemes, mainly those already in wind-up, have equalised members’ benefits and made correction payments. Schemes are likely to want to prioritise equalising benefits for their members, before turning to members who took transfers out — potentially 30 years ago.”

Alasdair Mayes, partner and head of GMP equalisation at LCP, who helped draft the guidance, added: “It’s really important that trustees address past transfers in a practical but robust way. The guidance explains the key issues and sets out practical solutions.

“In our experience, the sums due to members are averaging less than 1 per cent of the original transfer. That might sound small but it could be £1,000 or more for those that were disadvantaged.”

He added that paying the top-up as cash straight to the individual “can simplify the process significantly, but robust processes are required given the much higher risk of fraud than if the top-up is paid to the original receiving pension scheme”. 

There may be trouble ahead

The guidance acknowledges that a number of “practical hurdles” remain, not least where transferring schemes have missing or incomplete data preventing them from calculating and discharging a top-up, or where the member cannot be traced.

The problem will be particularly acute for schemes in the process of winding up, which “will need to discuss with their advisers how to address undischarged liabilities as part of the winding up process”, the guidance states. 

“It’s uncertain the extent to which trustees would be protected by statutory advertisements and/or if run-off insurance cover would provide protection. In practice, employers may need to provide indemnities to trustees of schemes in wind up to cover such liabilities if they can’t be resolved before completion of the wind-up.”

John Cormell, principal and head of GMP equalisation at Barnett Waddingham, welcomed the fact that the guidance “sets out the challenges faced by schemes in terms of the practicalities of data gathering, calculating the necessary top-up payments, and arranging or receiving payments”.

“It offers potential solutions for some of these and sets out the questions that schemes should consider in order to map out their approach to equalising historic transfers out,” he said.

“There is no doubt that this will be a significant project over the coming months and years, but this guidance helps to give a clearer picture as to what this project will involve, noting it will likely require pragmatism in order to reach satisfactory outcomes for both current and former members.”

Uncertainty remains

The guidance includes a section on the role of receiving plans in individual transfers, noting that the specific legal obligations of receiving plans remain uncertain despite the Lloyds 2020 judgment.

This is largely because there was no discussion of the implications and precise application of the European Court of Justice’s decision in the Coloroll case, which established that pension schemes had to equalise pension benefits between men and women, with effect from May 1990.

“Read literally, the Coloroll decision, where it applies, would appear to require a receiving plan to increase the benefits payable to a transferred-in member to make good any shortfall in the transfer value originally received when the member reaches retirement age,” the PASA update explains.

“In practice, to comply with this requirement a receiving plan would first need to know the transfer value originally received would have been higher had the transferring scheme made an adjustment to reflect GMP inequalities and the amount of this shortfall.

“Without this information it won’t be possible to comply with the Coloroll requirements,” it continues. 

Further, the Lloyds 2020 decision ruled that in principle, “the trustee’s obligation to equalise benefits for the effect of unequal GMP applies to benefits accrued on a contracted-out, salary-related basis in other schemes during the Barber window which have been transferred into any of the schemes”.

However, PASA’s update notes that it remains unclear whether this obligation replaces or is additional to the Coloroll requirement “to correct for the inequalities in the transfer payment originally received”.

The uncertainties around the interaction between Coloroll and the Lloyds 2020 judgment could give rise to a number of problems, PASA said.

It concluded that in practice, defined benefit receiving plans will need to decide “whether to equalise the benefits granted by the receiving plan in respect of the original transfer value”, and “if it’ll agree to accept a top-up payment if approached by a transferring scheme”.