Shortly after the High Court’s decision now 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.
In this series of blogs, we have put under the microscope some of the key issues raised by the Lloyds 3 decision, including some of the unanswered questions and practical difficulties that trustees will face in tackling GMP equalisation issues. Because of the complexities involved, with the best will in the world the majority of trustee boards will find that it will not be practicable to fully address all the potential GMP equalisation risks facing their scheme. In this blog, we go from “microscope” to “telescope” and examine the steps trustees might consider taking to prevent this reality from interfering with their long term objectives for securing liabilities outside their scheme.
In a previous blog in this series, we highlighted that one of the key principles established by the Lloyds 3 decision is that trustees are obliged to take proactive steps and plan how they will pay any GMP equalisation top-ups owed to former members who have taken a statutory cash equivalent transfer value.
As the Lloyds 3 decision only covers the specific questions the court was asked to consider in respect of the Lloyds Bank pension schemes, there remain many unanswered questions about trustees’ GMP equalisation obligations, and it is likely that some or all of the unresolved issues will never be addressed by the courts. Even where the law is clear following the Lloyds decisions, trustees face a number of practical difficulties in complying with their GMP equalisation obligations. Whilst trustees of ongoing schemes are likely to have more leeway to adapt as industry consensus develops regarding these challenges (many of which are discussed in guidance issued by the Pensions Administration Standards Association), trustees of schemes that are approaching buy-out may not have this luxury.
Trustees will need to discuss with their advisers how some of the tricky issues can be dealt with pragmatically. We have listed below examples of some of the common issues that trustees will need to consider (although this is not an exhaustive list).
- Gaps in historical records which make it impracticable (or impossible) to identify and address all of the top-ups that may be payable from their scheme.
- Where the former member cannot be traced, or does not engage with the trustees.
- Where the scheme has a complex history involving multiple mergers and restructurings, making the “in scope” member population difficult to assess.
- As we noted in a previous blog in this series, additional difficulties arise in respect of individual non-statutory transfers, as Lloyds 3 indicates that trustees are not automatically obliged to pay top-ups in respect of these transfers, without further intervention by the courts.
- Cases where a top-up is payable to a former member who has since died, or where there is no suitable receiving arrangement that is able and willing to receive the top-up.
When securing benefits with an annuity provider, it seems unlikely that trustees will benefit from a statutory discharge in respect of liabilities to pay GMP equalisation top-ups that they have been unable to distribute to the relevant beneficiaries. It also seems unlikely that publishing statutory “section 27” notices will provide protection against any claims arising post-buy-out (even where the historical records are hazy), because statutory notices do not provide protection against so-called “known unknowns”.
Given the lack of statutory protection available, the insurance industry is therefore likely to play a significant role in providing protection for trustees against GMP equalisation-related claims following termination of a pension scheme. Over time, a consensus may be reached on the minimum standards that will be expected of trustees in order to obtain all-risks cover in respect of GMP equalisation, but at this point trustees’ obligations are unclear. In cases where a top-up is, or may be, due but has not been paid at the point of termination, will it be sufficient for the trustees to disclose the existence of the possible claim? Or will insurers expect them to have taken measures to arrange payment before cover will be provided?
Even in cases where the prospect of buy-out is a distant goal, when developing their GMP equalisation strategy, there are some steps trustees can take to help ensure that, when their scheme reaches buy-out, they can obtain the insurance cover they need without disproportionate cost. Bumps in the road to buy-out can be made smoother by:
- Identifying all of the possible categories of claimant who may potentially be entitled to a GMP equalisation top-up. This includes not only current members, but former members who have taken a transfer value or full-commutation lump sum. Is the scheme liable to pay top-ups in respect of any bulk transfers paid to another pension scheme? What about GMP equalisation liabilities that the scheme has inherited as a result of historical scheme mergers?
- Establishing what records are available in respect of the potential beneficiaries. What steps have been taken, or will be taken, to fill any data gaps?
- Keeping accurate records of the steps taken to contact and trace beneficiaries to let them know about their entitlement.
- Ensuring that there is an accurate paper trail setting out the methods and assumptions used to calculate and pay top-ups and to address any practical difficulties that the trustees have encountered in their GMP equalisation projects.
In practice, GMP equalisation is a project to be tackled in stages, and your advisers can help you prioritise the various work-streams. It may be tempting to address only the more straightforward issues now, but be careful not to leave the other issues in the “too difficult” pile for too long, else you might risk GMP equalisation derailing your long-term journey plan.