Should receiving scheme trustees chase CETV top-ups?
It is currently generally accepted that trustees of defined benefit (DB) pension schemes are obliged to equalise benefits between male and female members to correct inequalities in guaranteed minimum pensions (GMPs), and that this extends to transferred-in benefits. Following the most recent Lloyds judgment, we now also know that transferring scheme trustees have an obligation to proactively consider topping-up individual statutory transfers (CETVs) where the transfer was less than it ought to have been as GMP equalisation benefit adjustments were not taken into account when the transfer was calculated. As a trustee of a DB scheme you may well be considering how to approach paying CETV top-ups. But the recent Lloyds judgment also presents a potential opportunity to turn around and look the other way, at CETVs received into your scheme.
What Is the Potential Opportunity?
Receiving DB scheme trustees may wish to consider actively pursuing top-ups from transferring schemes in respect of CETVs received into their scheme. The benefit of doing this is that any top-ups received could help to reduce the funding impact of making GMP equalisation adjustments.
How Might Receiving DB Scheme Trustees Pursue CETV Top-ups?
Firstly, it is worth noting that only the member has a right to bring a claim for a top-up to an unequalised CETV, not the receiving scheme trustees.
Secondly, the likelihood of a member of a DB scheme bringing a claim against a transferring scheme for a CETV top-up payment is slim, as there may be little benefit to the member in doing this; the member will receive equalised benefits from the receiving DB scheme in any event. As such, trustees should not rely on members pursuing tops-up payments that could be due to the receiving DB scheme.
This leaves receiving scheme trustees relying on the obligation on transferring trustees to consider paying CETV top-ups.
Whilst a formal claim is not possible, receiving scheme trustees could consider contacting transferring scheme trustees to ask what steps the transferring trustees are taking to pay CETV top-ups, clarify any changes in scheme name or scheme contact details that have occurred since the transfer(s) took place and to offer assistance. This is in itself may encourage top-ups to be paid sooner rather than later. It could be time particularly well spent where a number of members have transferred across from the same scheme (not forgetting that data protection legislation may restrict the receiving scheme’s ability to refer to any specific individual transfers or their members’ personal data).
Indeed, depending on the circumstances and the outcome of a cost-benefit analysis, it could be argued that trustees are under a duty to pursue CETV top-ups from transferring schemes, as part of their duty to secure the benefits due under the scheme rules, which is ultimately affected by the scheme’s funding level. On the other hand, this is debatable given that receiving scheme trustees have no clear legal entitlement to pursue CETV top-ups.
Food for Thought
There has been some commentary regarding whether we might see trustees of some DB schemes reaching “knock for knock” agreements between themselves; meaning that they agree not to pursue CETV top-ups from the other scheme. This may depend on the number of transfers involved and the size of equalisation liability, but I question whether there would be enough reciprocity between two (or more) schemes to make this viable. It is also unclear how a “knock for knock” agreement might interact with the obligation on transferring scheme trustees to proactively top-up CETVs, and whether it is possible to effectively “contract-out” of this obligation.
Whilst I think it unlikely that “knock for knock” agreements will get off the ground, I do predict that there will be increased interaction between DB pension scheme trustees as the practicalities of processing CETV top-ups start to kick in over the coming months. Trustees should be mindful that their scheme, along with most other DB pension schemes, is likely to have a dual capacity in being both a transferring scheme and a receiving scheme. Therefore, the trustees who decide to chase top-ups would be wise to do so in a helpful and conciliatory way so that they might be afforded the same approach in return!
The opinions expressed are those of the author and do not necessarily reflect the views of the Firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.