As reported in our article in November, GMP Equalisation - transfers out, the most recent judgment in the series of Lloyds Bank cases, handed down in November 2020 (the Transfer Judgment), considered the obligations on trustees of contracted out defined benefit schemes who had transferred out benefits to other pension schemes.

The judgment, however, has much wider implications and we take a more in-depth analysis in a two part review: part 1 (covering individual transfers out) is below and part 2 will follow next week.

The impact of the latest Lloyds judgment: not limited to GMP, not limited even to transfers!

The Transfer Judgment could be relevant to all types of pension schemes and trustees including:

  • money purchase schemes that have received a transfer from a contracted out defined benefit scheme
  • money purchase schemes with a GMP underpin
  • personal pension schemes that have received a transfer from a contracted out defined benefit scheme
  • employers who have merged schemes or made bulk transfers in respect of employees as part of buying or selling a business; and
  • trustees of all schemes who have relied upon legislation to provide them with a discharge – the quality and effectiveness of that discharge could now be in doubt.

But the Transfer Judgment does say a lot about transfers (and GMP)

In this article, we look at the implications of the Transfer Judgment for trustees of schemes which have historically transferred benefits out; trustees of schemes which have received transfers in; and sponsoring employers of occupational pension schemes in respect of statutory and non-statutory transfers.

Transferring Trustees

Trustees of occupational pension schemes which have been contracted out on a GMP basis (usually defined benefit schemes, but this also includes money purchase schemes with a GMP underpin) will undoubtedly have transferred out member benefits. Where the transferred out benefits relate to any period between May 1990 and April 1997, the Transfer Judgment could require the transferring trustees to carry out certain obligations. The nature and extent of those obligations will depend on whether the transfer was:

  • a statutory transfer
  • a non-statutory (or rules-based) transfer; or
  • a bulk transfer.

It is important to remember that GMP is inherently unequal and cannot (because it reflects a state benefit) be equalised. The obligation to equalise is to level up the excess benefit. Therefore if the transferring trustees paid a partial transfer and retained the GMP in the transferring scheme (because, for example, the receiving scheme was not contracted out) there is still an obligation to equalise the excess benefits.

Statutory Transfers

In relation to a statutory transfer, trustees of the transferring scheme are under an obligation to correct previous transfers out by paying top-ups to receiving schemes, as a failure to do so constitutes a breach of duty (and may therefore invalidate exoneration and indemnity provisions in the scheme rules).

Non-statutory Transfers

In relation to non-statutory (often referred to as rules-based) transfers, whether a failure to pay top-ups could amount to a breach of duty depends, as each case will turn on its own facts. Non-statutory transfers could include some partial transfers, and transfers made in respect of a member who ceased pensionable service less than a year prior to their normal pension age (normal pension age is often not the same as normal retirement age). If trustees had a power to make non-statutory transfers and there is no evidence that the power was improperly exercised, they may be able to conclude that they need take no action unless and until there is a member claim. We recommend that trustees take steps to assess the risk of taking such an approach. As a minimum, we recommend trustees assess whether they had/have the power to make non-statutory transfers. Other steps may include assessing how many non-statutory transfers have been made, the likely magnitude of the top-ups, the terms of the exoneration or indemnity clause in their scheme rules and whether they have had previous legal or actuarial advice which may invalidate the exoneration/indemnity (for example advice which confirms that a failure to equalise may be a breach of duty). Particular care should be taken in relation to enhanced transfer value exercises and we recommend that these are revisited.

Action: Many schemes will be hampered by insufficient data and it may not be possible to distinguish between statutory and non-statutory transfers. Alternatively non-statutory transfers may be such a small proportion that to treat them differently (i.e. less generously) is not worthwhile.

If trustees wish to be proactive to correct non-statutory transfers and not wait for a claim (particularly if they are unable to distinguish in their records which transfers were non-statutory or there is an urgent need to act, such as a scheme wind up), they will need to consider what powers they have under their scheme rules to make a top-up payment. If those powers need employer consent – such as the augmentation power – then a conversation needs to be had with the employer.

Receiving trustees

Trustees of receiving schemes have a duty to equalise benefits in their scheme. Where the receiving scheme is a defined benefit scheme this will be a funding strain and is relatively simple to understand. The position is more complicated where the receiving scheme is a defined contribution arrangement. Receiving trustees should, as a minimum, assess their available data regarding historic transfers in and give some thought to whether they should write to transferring schemes regarding the payment of a top-up. If this is likely to be a significant and costly exercise, they should discuss with the employer whether it wishes the trustees to proceed or whether it is willing to fund the liabilities without recourse to transferring schemes.

Scheme employers

As mentioned above, trustees of both transferring and receiving schemes may well need input from the scheme's employer. We recommend that employers engage with their trustees to identify what actions may be needed and the likely financial impact of those actions.

Practical points to check following the Transfer Judgment

  • Transferring trustees should review historic data to:
    • distinguish statutory and non-statutory transfers
    • identify enhanced transfer value exercises; and
    • establish the value of any bulk transfers made from (and received by) the scheme.
  • Transferring trustees should decide with the employer whether they should take a different approach to non-statutory transfers. If a different approach is being considered, legal advice on the terms of the exoneration, indemnity and forfeiture provisions in the scheme rules should be obtained
  • Receiving trustees should consider the quality of their transferred-in benefits data: Is it clear whether a top-up is required? Can that top-up be calculated from the data? Is the cumulative cost of those top-ups material enough to consider whether to contact transferring schemes regarding the payment of a top-up?