GMP Equalisation and Underpaid Cash Equivalent Transfer Values – Will Trustees Have to Trace and Compensate Members Proactively, or Can Trustees Wait for Claims?
Shortly after the High Court decision commonly referred to as “Lloyds 3”, which considered the issue of guaranteed minimum pension (GMP) equalisation and the extent to which past transfers out should be revisited, we published a summary of the decision and our initial reaction. We continue to look at some of the key issues raised by the Lloyds 3 decision in a series of blogs. In this blog, we will consider the question of whether, and to what extent, trustees have to be “proactive” in seeking, finding and topping up cash equivalent transfer values that were underpaid as a result of a failure to equalise for the effect of unequal GMPs.
This question was considered in the Lloyds 3 case in relation to a number of pension schemes connected with the Lloyds Banking Group. Should the Trustee of those schemes proactively seek to identify and calculate any shortfalls in previous cash equivalent transfer values and take steps to equalise them? Alternatively, and given that the outcome of the legal case is to provide pension scheme members with a valid claim for equalised cash equivalent transfer values, could the Trustee “wait and see” until a request is made by the receiving scheme or by the transferred-out member?
A number of matters were considered in the case, including the lack of a time limit on the members’ claims for top ups to underpaid cash equivalent transfer values, and the likely cost consequences of a proactive exercise to try to identify all possible claimants. It was noted that the amount of members’ top-up payments could be modest, and could well be greatly exceeded by the administrative costs involved in a proactive exercise. It was also noted that these costs would ultimately be passed on to the sponsor of the pension scheme and would, therefore, increase the overall cost of providing benefits.
Although the final determination in the case gives some recognition to these cost considerations, it is clear that a “wait and see” approach by trustees will not be accepted. As a result of the case, trustees should be proactive in recognising that there has been a failure to comply with the legal obligation to pay equalised cash equivalent transfer values; that members can claim top ups to these transfers; and (assuming that the trustees are in a similar position to the Lloyds schemes Trustee) that the trustees will probably have to go back to 17 May 1990 when identifying transfers for which a top-up payment is due. Trustees should then decide how they will address these considerations, and what they will do. We recommend that, as part of this process, trustees ask their legal advisers to advise whether the principles set out in the Lloyds 3 judgment will fully apply to their own schemes and scheme documentation.
The actions trustees will take in relation to this requirement for proactivity will depend upon the particular circumstances of their pension scheme. Where the pension scheme has many years still to run, then the trustees may decide to put together a strategy that will seek to remedy underpaid cash equivalent transfer values in the context of a wider GMP equalisation project. There is no ruling from the case that will guide trustees in relation to the length of time required to remedy underpaid transfers. The ruling simply indicated that trustees should consider their obligations, and the remedies available to the membership, and then decide what to do.
Where the pension scheme is closer to its end-point, which for most pension schemes will mean buyout on the insurance market, then more accelerated action will be necessary.
For trustees who are at, or reaching, the point of buyout, then an exercise of reviewing past cash equivalent transfer values, and seeking to pay top ups due, where possible, is likely to be necessary. In buying out and winding up their pension scheme, trustees will seek to reach an end point after which there is no further liability. Before releasing all of their scheme assets, therefore, the trustees will wish to know whether there remain undischarged obligations to top-up transfer payments.
Trustees may seek to rely upon run-off insurance that includes cover for residual GMP equalisation liabilities relating to past transfers. However, it is unlikely that the insurer will provide cover for these liabilities unless the trustees have carried out a due diligence exercise to identify and address as many outstanding top-up claims as possible. If, as an alternative, the trustees seek to have a continuing employer indemnity to provide cover for run-off liabilities, then the estimated cost of topping up transfer payments will be relevant to the trustees’ appraisal of whether or not that employer indemnity will be sufficient.
In summary, it is clear that trustees cannot wait for members to claim top ups to historical transfers paid under the cash equivalent transfer value legislation. They should proactively develop a plan to identify and pay the top-up payments due for their own scheme. The court appears to have given trustees some latitude regarding how quickly that plan should be implemented, which will provide a reasonable level of flexibility to many trustees handling the practical difficulties of topping up historical transfers, potentially all the way back to 1990.