Since the first Lloyds judgment, trustees and sponsoring employers have, understandably, been focussing on some of the more straightforward elements of GMP equalisation (if there is such a thing). However, following Lloyds 3, some tricky issues have reared their head; employers and trustees are having to take a closer look at previous transfers and in many cases it feels as if this is raising more questions than it answers. PASA recognised some of these issues in its recent guidance; we examine a few particular issues below, which are causing a headache for trustees attempting to take the next step in their GMP equalisation project.
Lloyds 3 makes it clear that trustees have a duty to revisit statutory transfers and potentially pay top ups but, in practice, it is not always clear whether a particular transfer was made under the cash equivalent transfer value (CETV) legislation. Many schemes use a very similar process and calculation methodology for both statutory and non-statutory transfer values. Transfers made within one year of normal retirement date (and therefore clearly non-statutory) should be easy to identify; spotting others will not be as straightforward, particularly where transfers date back decades and where scheme data is incomplete. PASA acknowledges this and indicates that transferring schemes may choose to correct non-statutory transfers in the same way as statutory transfers. However, is it that straightforward? Trustees have the power to correct statutory transfers in order to comply with Lloyds but the same cannot be said for non-statutory transfers. The Court held that the trustees’ decision to pay an unequal non-statutory transfer value could be invalid but it would generally require the member to make an application to Court to require payment of the additional top up; PASA notes that in many cases it will be impractical for members to bring such a claim given the costs involved. This may lead trustees to consider paying top ups in respect of non-statutory transfers without a court application. Whether this is possible will require careful analysis of powers in scheme rules and tax consequences will also need to be considered; legal advice will be required.
Over recent years many schemes have carried out liability reduction exercises, including enhanced transfer value (ETV) exercises. ETVs can be carried out on a statutory or non-statutory basis; historic exercises will need to be revisited to determine whether top ups are needed. Although trustees may want to conclude that ETV exercises were carried out on a non-statutory basis (and therefore, subject to the rules of the particular scheme, do not need to be revisited), this will very much turn on the procedure members had to follow to accept the ETV. In addition, where top ups are required, the question of how enhancements should be treated becomes relevant. Can it be argued that as an enhancement has already been made to the transfer value that a top up is not needed? Maybe, but unlikely in most cases. Where enhancements are calculated as a percentage of the transfer value, does the enhancement also need to be revisited? This is likely to be scheme specific and PASA acknowledges that advice will be required.
What about schemes that have recently wound up? Or those on the cusp of winding up where member benefits have been secured and there are no funds from which to pay top ups? Strictly speaking, following Lloyds 3 the trustees of such schemes are still obliged to revisit previous CETVs and potentially make the necessary top ups. However, trustees are in a difficult position where there are no funds to make the payments and/or where the sponsoring employer is unable or unwilling to fund the top ups and/or provide indemnity protection to cover any residual risk. In such circumstances, trustees should be seeking legal advice; in some circumstances forfeiture provisions and the Limitation Act 1980 may help, as recognised in PASA’s guidance. Trustees should also be considering the terms of buy out contracts or merger deeds (as applicable), along with any indemnity protection provided by sponsoring employers and/or trustee insurance.
Finally what about members who have left the scheme by a method other than a transfer out? Divorce settlements, lump sum settlements (for example, serious and trivial commutation lump sums) and member deaths will also need to be considered and, if necessary, top ups paid. There are some obvious questions for trustees about how to approach these. Are trustees required to make payments to the next of kin following a member’s death? What if there is no next of kin, or they have subsequently died too? Do trustees need to carry out a full tracing exercise to find someone who has taken a cash commutation from the scheme, possibly decades ago? What if the tracing exercise is unsuccessful? The list goes on.
Trustees ultimately have an obligation to pay top ups but where do they draw the line; can a pragmatic approach be taken? This will need to be considered on a case by case basis, particularly where schemes are attempting to buy out and/or wind up imminently and do not have time to wait for an industry consensus to develop. Although further case law clarifying some of these issues would be helpful, PASA notes “There remain some unresolved issues following the Lloyds 2020 decision. Given the high cost of court proceedings of this nature and the modest impact on individual transfer payments, it may well be these uncertainties are never resolved by the Courts and schemes will need to address the issues with their advisers.” Unfortunately there are no easy answers and PASA sums it up perfectly: “there are a number of practical hurdles which will mean perfection cannot be achieved”.
The opinions expressed are those of the author(s) 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.