Lawyers suggest that this November’s High Court ruling concerning the Lloyds Banking Group guaranteed minimum pensions equalisation and transfers is likely to be the last of the big policy- setting court cases on the issue.
But the administrative task for the pensions industry looks set to continue for several more years.
The first court decision just over two years ago set the direction requiring equalisation and even suggesting ways in which it should be done, but it did not deal with transfers.
On the 20th November, the atest judgment in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc did deal with transfers and in broad terms made transferring schemes liable for top ups.
This new ruling runs to 400 pages, and considers three main situations.
For transfers made under the cash equivalent legislation, the court says the trustee owed a duty to a transferring member to make a transfer payment which was correctly calculated, reflecting the member’s right to equalised benefits. The trustee committed a breach of that duty in some cases by making an inadequate transfer payment.
Crucially, it says the trustee is not discharged from that liability by any statutory provision, scheme rule or by any agreement with the transferring member.
The member can seek a remedy including an order from the court which is not time barred. In effect, this means that the transfers concerned may extend back as far as 1990, presenting a costly administrative headache.
Generally, it appears the court wants this reflected in the trustees paying a top-up transfer to the receiving scheme, equal to the shortfall plus a simple interest calculation at 1 per cent above base ate. The court decided not to look at issues such as the loss of any potential investment growth.
Interestingly, the trustee is not required to provide a residual benefit, nor can the trustees require the transferee to accept such a benefit. However, the Court has recognised that it might be possible to provide a residual benefit if both parties agree.
And if a receiving scheme is unwilling or unable to accept a top-up transfer, the court said an appropriate solution would need to be agreed between the transferring trustees and the transferee, or in the absence of agreement could be imposed by the courts which might order the trustees to pay compensation.
For bulk transfers, the judgment says where the relevant legislation has been complied with and the bulk transfer accorded with the rules of the transferring scheme, then the transferring members are entitled to benefits under the receiving scheme and no longer entitled to benefits under the transferring scheme.
For individual rule-based transfers which may include partial transfers, the judgment says that the legal position depends on whether the trustee committed a breach of duty.
The transferee could ask a court to consider whether the trustee committed a breach of duty by reference to the scheme rules, for example, by showing the t rustee gave inade quate consideration to the calculation of the transfer payment.
As Allen & Overy commented in its legal analysis, the court did not comment significantly on cases where the member has ceased to be a member of the receiving scheme or where the receiving scheme will not accept a top-up payment – nor where both the receiving scheme and the member have conflicting claims for payment of a top-up.
It further noted that Mr Justice Morgan ruled that there was no obligation in principle to make payment to the member’s current or most recent arrangement; but also suggested that the courts would be reluctant to hold that a trustee was relieved of the obligation to make any payment in these circumstances.
In summary, we have a lot of legal certainty and yet grey areas remain.
So what do corporate advisers make of the decision? Generally, they foresee an increase in administrative and operational challenges, but note that the ruling has much smaller funding implications.
Willis Towers Watson senior director Colin Smith says: “It’s much smaller in terms of numbers affected and liabilities: transferees are a small fraction of all members due an uplift and the aggregate impact ought to be less than £500m, whereas the 2018 ruling was estimated to add about £4bn to liabilities of FTSE350 companies alone.
“But there are different operational challenges: schemes will not always have details of the members concerned, and they may need to agree what to do where it is no longer possible to pay a top-up to the receiving scheme (because the member has died or withdrawn everything from that scheme). That said, the majority of transfer payments are likely have been made since ‘pension freedoms’ in 2015 so in general data should be available and the effort will be expended in formulating an efficient method of identifying the uplift to transfers values needed.”
Broadstone Corporate Benefits technical director David Brooks says: “One way of thinking about the magnitude of this is how much is this going to cost in respect of pension benefits?
“The impact on the liabilities of the pension scheme is relatively small – 1 or 2 per cent at most. But the cost of doing the work will far outweigh the difference in the liabilities. The 30-year cut-off is the real kicker. If it had been six year, we’d all be feeling quite relaxed.
“For trustees, the challenge is how do we make sure we have done this and assure ourselves we have found everybody who transferred out and transferred in, got the money from the scheme from which someone transferred in and paid the money to the person who transferred out. They want to get the point where they can say to the insurer or consolidator, if you buy this out, here is our GMP record and you are not going to get anyone coming out of the woodwork.”
PTL managing director Richard Butcher says: “The main challenge is the cost of all this. We all went about this using best endeavours, but this court case says ‘now you’ve got to fix this’. It stems not from us doing anything wrong originally. We were just following the law. Ultimately the cost comes to the employer and reduces the funding you have to secure the members’ benefits. The ruling itself may be fair and reasonable but it is a pain.
“The volumes of transfer traffic have been relatively high ever since the gilt yields have been low. There could be a lot of people to pick up with here. Once you have processed the transfer and in accordance with GDPR after a reasonable period of time you don’t keep all the data, you keep a bit of data. When it comes to calculating all of this, it is going to be a major piece of work. It could be an admin nightmare.”
On the other side of the equation, financial advisers are also mulling the implications.
Smith suggests that the numbers of transfers involved should be in six figures. “Data from the FCA indicates that more than 250,000 people have transferred from DB schemes to DC schemes since ‘pension freedom’ came in in 2015. Before then, transfers were more of a trickle than a flood but the ruling covers transfers going all the way back to 1990. Not all of these members transferring will have had GMPs and not all of those who did will be due an uplift.”
Could it mean a suspension of CETVs? Smith says: “The 2018 ruling already meant that new CETVs should be based on equalised benefits. Members have a statutory right to a CETV, so it is a difficult decision for trustees to suspend CETVs. Arguably this is more about being clear with members whether the CETV includes an allowance for GMP equalisation or not and, in the case of the latter, what the process for addressing adjustments for GMP equalisation will be.
“Very few, if any, schemes suspended CETVs following the 2018 ruling, continuing to pay CETVs on an unequalised basis whilst processes and procedures were updated to permit GMP equalised calculations. Many schemes are now providing equalised CETVs for new transfer quotes or expecting to start doing this over the next few months.”
Financial adviser are also taking a hard look at their approach. CanScot Solution principal Robert Reid says: “Advisers are going to have make their clients aware of this. They have to make them non-passive. They should be getting a letter to trustees as fast as possible, getting it acknowledged and asking for a timeline, importantly asking for a copy of the calculations. It would not be the first time someone has screwed up the numbers.
“If it’s a big differential, it could push a client into another tax bracket and there is nothing you can do about it. That seems a bit unfair, but you can’t ask the scheme to spread the payments. “The next part is pensions and divorce. You will have already lodged it but you will be getting an upgrade in respect of a full GMP. How does that leave your spouse who may have got a benefit based on a false calculation perhaps? Do you have to open it back up? Probably not, but if there is ongoing maintenance you might.”
“You need to draw a timeline and look at all the things that could have happened over 30 years. The person could be dead. They could have got divorced, transferred somewhere else, or bought an annuity. It is almost like a life stages discussion.”