With the High Court judgment in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc and others (Lloyds) now several months behind us, this article summarises the developments since the judgment and considers the next steps for trustees and employers of affected pension plans.
A quick re-cap
The High Court held that schemes with guaranteed minimum pensions (GMPs) are under an obligation to equalise for the effect of GMPs, which are unequal between men and women by virtue of the legislation which governs them. The equalisation requirement only applies to the period 17 May 1990 to 5 April 1997.
The judgment considered several proposed equalisation methods, with the following methods being acceptable options:
- Methods B, C1 and C2 – very broadly, all involve maintaining a "ghost record" based on a notional opposite-sex comparator for every affected member, and making year-on-year comparisons between the member's record and the ghost record so as to provide the more generous benefit
- Method D2 – broadly, carrying out a one-off actuarial equivalence calculation for each affected member and their notional opposite sex comparator, and taking the higher of the two calculations; then converting the equalised GMP into non-GMP benefits in line with the existing GMP conversion legislation
It was also held that, for pension payments which have already been paid on an unequalised basis, any shortfall will need to be paid as arrears. The judge said that plans which have provisions limiting how far back arrears payments can go (known as "forfeiture clauses") would only have to pay arrears back to the relevant date in the plan rules; otherwise there would be no limit and full arrears payments would be required.
Developments since the Lloyds decision
A second Lloyds hearing was held in December 2018, with the judgment published on 6 December 2018. The judgment provided clarification on the process for method D2: it was held to be unnecessary to first use one of methods B, C1 or C2 to equalise for GMPs before carrying out the conversion. Instead, an actuarial equivalence calculation can be used, and the judge explicitly noted that actuaries have flexibility in setting the assumptions.
Further hearings likely?
The High Court rejected the Representative Beneficiaries' application to appeal two elements of the decision – the limitation on arrears payments resulting from pension plans' forfeiture clauses, and the rejection of method A as an acceptable equalisation method. The deadline for asking the Court of Appeal to allow an appeal on these points has also now expired, unless there has been an agreement between the parties to extend that deadline.
Separately, there were two issues before the court on which the judge was asked not to decide, namely:
- what action, if any, should be taken by a plan in relation to benefits which had previously transferred out of that plan, and
- what action should be taken in relation to members for whom the cost of equalising would exceed the amount of additional benefit the member would receive if equalisation were carried out
There may be a further hearing during the coming months to deal with these issues, although the possibility remains that the parties may agree an approach between themselves without the issues going to court.
There are a number of outstanding questions about how to achieve GMP equalisation. Further guidance should be forthcoming during the next few months – the key areas where we are likely to see new information are:
1. The Department for Work and Pensions has committed to issue guidance on GMP conversion
2. The Association of Pension Lawyers has written to HMRC in relation to tax issues arising from GMP equalisation. The Association of Consulting Actuaries has also written to HMRC seeking clarity on the tax consequences of GMP equalisation. The letter states that an accommodating approach should be adopted by HMRC on the basis that the equalisation issue does not afford individuals any opportunity to manipulate their savings patterns to obtain an tax advantage, and calls for general guidance on the matter
Following a Freedom of Information request which showed that thousands of individuals with "fixed protection" could suffer significant tax bills if GMP equalisation results in their defined benefit rights increasing, HMRC said that it is "considering the potential tax implications of individuals receiving an increase in their pension, following GMP equalisation"
Subsequently HMRC has announced that it is setting up a working group to consider the pension tax issues arising from GMP equalisation. The group, which will be chaired by HMRC and include selected industry representatives, will work alongside other industry groups which are looking to address the wider issues arising from the equalisation of GMPs. The group's first meeting will take place in April 2019
3. The Association of Pension Lawyers has also written to the Pensions Regulator about transfer delays following the judgment
Where next for employers and trustees?
Day-to-day scheme administration: transfer values
The immediate concerns for pension plans relate to the day-to-day actions which will need to be dealt with during the interim period between the Lloyds judgment and the implementation of a full GMP equalisation exercise. These include transfer requests, pension sharing, trivial commutation requests and serious ill-health commutation.
In the first months following the judgment, a number of plan administrators and actuaries recommended that no changes were made to the day-to-day administration, and that, for example, transfer values were calculated on an unequalised basis just as they had been before the judgment with a view to paying a top-up if needed on implementing GMP equalisation.
However, as the dust has settled, some administrators and actuaries have proposed applying some form of GMP equalisation method to transfer values being calculated for the purposes of transfers, commutation and so on. The detail of the proposed solutions varies; this will partly be due to the fact that the methods approved in the Lloyds judgment all apply to actual benefits that are paid from a scheme, rather than to calculating a capital value that represents the assumed benefits that could be paid.
Although the application of a GMP equalisation method to transfer values should result in the trustees being fully discharged of their obligations to individuals whose benefits transfer out of the plan or are commuted, there are still uncertainties as to whether the proposed approaches will achieve their object and, more generally, whether any actions taken by trustees in relation to GMP equalisation could constitute a failure to comply with their duties to plan members and beneficiaries.
Trustees should, therefore, consider how well they are protected from liability in such circumstances, and may conclude that additional protections, such as an indemnity from the employer, are needed.
Long-term GMP equalisation exercises
Trustees and employers should be starting to work towards the planning of full GMP equalisation exercises for their plans, and working groups are being formed. However, any implementation should be on hold until the expected guidance noted above is published. We expect a long-term approach to be taken by most plans (equalisation exercises are generally expected to take around 2-4 years).
It seems likely that many plans will consider GMP conversion as a way to remove the onerous administrative burden associated with methods B, C1 and C2. In particular, insurers may well require GMPs to be converted to non-GMPs before agreeing to a buy-out of plan benefits. If any method other than C2 is to be used, the employer's agreement will be needed, so we expect to see collaboration between trustees and employers for most plans.