As the pensions industry grapples with the complex judgment in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc ('Lloyds 2'), here is an idea to make life easier:
'Knock for knock'
In the world of car insurance, insurers adopt a 'knock for knock' policy. In other words, two insurers agree that when there is a car accident, each insurer pays the losses of its own policyholder regardless of which policyholder was at fault. The advantage is a saving in administrative costs and a much more efficient claims process.
Which got me thinking……..
Where there has been a defined benefit (DB) to DB transfer, the legal position now appears to be that transferring schemes may (depending on the circumstances) remain liable to make top-up payments to account for GMP equalisation. But, by virtue of Coloroll, receiving schemes are under a concurrent duty to do the same thing. And in practice, many receiving schemes are already in the process of dealing with GMP equalisation for all of their members (whether transferred-in or not).
So wouldn’t life be simpler if everyone took a 'knock for knock' approach? In other words, receiving schemes deal with GMP equalisation for transferred-in members (as per Coloroll) and transferring schemes have one less thing to worry about - at least for all DB to DB transfers (whether individual or bulk). Sure, it could be said that there would be winners and losers amongst the schemes. But how many schemes are actually planning to receive top-ups from transferring schemes in any event? Wouldn’t it be easier for each scheme to deal with the membership data in front of it, rather than tracking multiple transfers in / out over several decades and paying (or claiming) top-ups to (or from) multiple destinations? Wouldn’t the savings in time and administration costs make everyone a winner? Plus, most important of all, members would receive the correct outcome in terms of the amount of pension they receive from the receiving scheme.
But, but, but………..
…..life cannot be this simple can it, especially where GMPs are concerned?
To get the conversation started, here are some issues (and possible solutions) we have identified:
- DB transfers-in have been less common in recent years so would this really help? True, but we think there could be plenty to go for here, particularly within industries or sectors where DB to DB transfers are more common. Also, while bulk transfers are dealt with in a different way in Lloyds 2, maybe this is another way of approaching those?
- How can 'knock for knock' work across an industry where there are not two parties but many hundred? Don’t you need a different analogy? Maybe the analogy has been stretched to breaking point but the overall concept (i.e. that every DB scheme could adopt 'knock for knock' with every other DB scheme industry wide) remains an interesting one. Absent an industry-wide adoption of this idea, perhaps the idea still works within particular sectors?
- How can diligent transferring trustees get comfort that receiving schemes really are treating their former members appropriately? There may be ways that assurances could be given at an industry-wide level but the practical answer might be a 'wait and see' policy for now safe in the knowledge that Coloroll requires receiving schemes to take action. It is worth remembering that, even if the transferring trustees had made top-up payments, they could never be certain that receiving schemes would administer this correctly.
- Would members who took an individual CETV still have a right to demand the top-up payment? The answer here might be that they do (which is useful as a fall-back if the receiving scheme fails to equalise for GMPs) but the practical risk of a claim seems remote in circumstances where a receiving scheme has equalised and a member would have nothing further to gain?
- Would the transferring trustees receive a statutory discharge? Possibly not, but in circumstances where they may inadvertently have failed to secure one for many years already, and where members should have their benefits equalised in full by a receiving scheme in due course, is this something they can live with given the alternative?
So, what do you think? Is there a way that this could be made to work, or is it wishful thinking that any of this can be simplified? Is there an industry-wide solution here, or at least room for co-operation within certain sectors or groups of schemes?