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 One can be found here and Part Two is below.

Bulk Transfers

The Transfer Judgment concluded that transferring trustees will not be required to top-up "bulk" transfers provided these were conducted without member consent, the requirements of Regulation 12 of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 (including the provision of an actuarial certificate historically known as a "GN16" certificate) were complied with and they were conducted within the scheme's rules. The reference to "mirror image" transfers in the early paragraphs of the Transfer Judgment seems to be a red herring – compliance with the statutory (and scheme-specific) bulk transfer requirements appears to be sufficient based on the judge's concluding comments.

Historically, many bulk transfers will have been conducted on a "with consent" basis in respect of active members. A Regulation 12 certificate is unlikely to have been obtained in relation to such members and consequently they will need to be looked at in a similar way to individual transfers (although they may still be subject to bulk rather than individual transfer provisions under the scheme's rules).

There are two main circumstances in which bulk transfers are made: as part of a restructuring of pension arrangements within a corporate group; and following an arms-length corporate transaction. Bulk transfers are generally documented in a transfer deed or merger deed; where they relate to a corporate transaction, the transaction documentation (i.e the sale & purchase agreement, often with a pensions schedule) will also be relevant.

Trustees (particularly receiving trustees) and sponsoring employers should review the documentation relating to historic bulk transfers, to check whether the requirements of Regulation 12 and the scheme rules were met. If any requirement was not met:

  • Trustees of transferring schemes – will need to consider action to top up the transferred benefits. They should consider whether there are any provisions such as an indemnity in the bulk transfer documentation, including the sale and purchase agreement where relevant, which would relieve them of the obligation to top up benefits. In practice, many transferring schemes will have wound up after a bulk transfer of all the benefits in the scheme, meaning that the trustees of such schemes will no longer be in existence
  • Trustees of receiving schemes – should consider whether it is possible to make a claim for a top-up from the transferring scheme (if it still exists), or against any warranty or indemnity from the transferring employer. If a claim is possible, the trustees will need to consider whether it is justified – in particular, will the cost of pursuing a claim outweigh the amount which could be recovered, and could too much time have passed for a claim to be possible? A conversation with the sponsoring employer will help to clarify the approach, given that the employer will ultimately be financing any claim and the cost of equalisation under the scheme
  • Scheme employers – should engage with their scheme's trustees in relation to the approach to making claims from the transferring scheme or under any warranties or indemnities. They should also identify the risk of any claims against them, under indemnities provided by them. The additional liability of equalising for unequal GMP may be immaterial when compared with the total liabilities of the scheme so the effort and cost of bring any claims (particularly in relation to very historic bulk transfers) may not be worthwhile. However, it is important to take into account any obligation to make top-up payments in relation to any bulk transfers made from the scheme.

A tailored approach will be needed, based on the terms of any bulk transfers into or out of the scheme. We recommend that trustees and employers get in touch with their usual contact in the pensions team to discuss their strategy regarding the treatment of bulk transfers in more detail.

Does the law not impose time limits to prevent claims in relation to historic transfers being made?

Statutory transfers

The Transfer Judgment made it very clear that for statutory transfers there is no time limit and any forfeiture rules in the scheme rules are overridden by the statutory regime.

Non-statutory transfers

For non-statutory transfers out, it will be necessary to check the specific forfeiture rules of the scheme, as forfeiture is not automatically prohibited by the legislation. Trustees will need to know whether the forfeiture rule will apply automatically or whether they have a discretion to forfeit (in which case they will need to consider whether to exercise that discretion).

As well as the scope of the forfeiture rule itself, the position will depend on the question of what a transferred out member has a claim to – either a top-up payment or a residual benefit inside or outside of the transferring scheme. For example, if the member has a right to a top-up payment only, based on the framing of the Transfer Judgment and the way in which forfeiture rules are generally worded, the forfeiture provision is less likely to apply. We recommend that trustees of transferring schemes get in touch with their usual contact in the pensions team for advice on this question.

What about the tax implications?

At this stage, it is difficult to know what tax treatment will apply where action needs to be taken to equalise past transfers out – there will be different consequences depending on how any additional benefit should be categorised. It is hoped that HMRC will issue new guidance following the Transfer Judgment to clarify the tax position. We will keep you updated on developments.

Practical points to check following the Transfer Judgment

Trustees and employers should review documentation relating to historic bulk transfers, including transfer/merger deeds and, where relevant, sale and purchase agreements. The review should identify where obligations lie and what indemnities or warranties may apply.

See Part 1 for other practical points.