The High Court in England and Wales has ruled that trustees are required to remedy certain past transfers out of defined benefit schemes which did not account for the equalisation of guaranteed minimum pensions (“GMPs”) (Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank PLC & Ors [2020] EWCh 3135 (Ch)). It is a decision that is likely to cause administrative headaches for the trustees of affected schemes for months – or years – to come.

Following his judgment in October 2018 that benefits accrued between 17 May 1990 and 5 April 1997 required to be equalised for the effect of GMPs by defined benefit schemes, Mr Justice Morgan has now addressed – at least in part – the outstanding issue of how previous transfers-out should be dealt with. Here are the key rulings relating to the payment of cash equivalent transfer values (“CETVs”):

  • Duty to equalise GMPs: The duty of transferring trustees to pay a CETV that reflected equalised benefits extended to equalised GMPs. By not making an adequate transfer payment that reflected the equalisation of GMPs, trustees breached that duty at the time of the transfer, and remain liable for the breach.

  • Top-ups: Where a breach has occurred, trustees are obliged in principle to make a top-up payment to the receiving scheme. They are not obliged to provide a ‘residual benefit’ as an alternative to making a top-up payment, nor can trustees choose to force the member to accept a residual benefit instead. It is, however, open to trustees and a member to agree an alternative. That view assumes that the member is still in the receiving scheme: the judge declined to give a definitive view on circumstances in which a member had subsequently transferred out of the receiving scheme or otherwise ceased to be a member.

Additionally and for administrative simplicity, the judge decided on an interest rate for top-up payments of 1% above base rate.

  • Time bar: Trustees cannot rely on a time bar, whether under the rules or under the Limitation Act 1980, to resist the claim of members to top-up payments. The judge considered the Lloyds schemes’ forfeiture rules as well as related provisions of the Pensions Act 1995, and concluded that the right to require a top-up payment to a receiving scheme was distinct from the various rights in the transferring schemes’ rules to ‘benefits’, ‘pension’ or ‘instalments’ which could be forfeited under those rules or under the relevant legislation.

  • Proactivity: Trustees need to be proactive in considering the rights and obligations involved, the remedies available to members in the absence of a time bar and “then determine what to do”. It remains to be seen as to how far trustees need to go in that regard: it is unclear, for example, whether that involves contacting all past transferred-out members and/or receiving schemes.

  • Discharge forms: The judge considered five standard discharge forms used by the trustees of the various Lloyds schemes: while the drafting related specifically to those schemes, the wording is likely to be similar to that which has been used more widely by UK schemes. Broadly, his main findings were:

    • In relation to two of the forms, the discharge was ineffective as regards the GMP entitlement because the transfer was “not of the whole of the member’s entitlement under the scheme” where it did not include an amount needed to reflect equalised benefits.

    • On the remaining three forms, the discharge in respect of a member’s “benefits” did not extend to any entitlement of the member to require the trustees to make a top-up payment to the receiving scheme.

Separate consideration was also given in respect of individual transfers made under scheme rules and different types of bulk transfers. On those matters, the judge made the following additional decisions.

Individual rule-based transfers

  • Where trustees have exercised their power to pay a non-statutory transfer under their scheme rules, the transferring member no longer has rights under the transferring scheme unless the court sets aside the trustees’ exercise of that power - leaving the transferring member to require the trustees to exercise the power afresh. The court could only set aside the decision if the trustees had committed a breach of duty when exercising the power.

  • For non-statutory transfer discharge forms, trustees may still get the benefit of a discharge in the case of individual rule-based transfers for so long as the decision as to the amount of the transfer payment “remains a valid and effective decision”.

  • In terms of the question of trustees being proactive, while it might be that prior payments may be open to challenge, it would not be appropriate “in general” for the trustees to initiate a court action (although in practical terms, the trustees may be the only suitable party to bring the matter before a court).

Bulk transfers
As to bulk transfers in respect of which members’ rights in the receiving scheme ‘mirrored’ those under the transferring scheme, assuming that they were made in accordance with relevant legislation (including regulation 12 of the 1991 Regulations) and the scheme rules, then trustees would be discharged from the duty to provide benefits under their scheme. Any obligation to equalise GMPs would pass to the receiving scheme: the receiving trustees may then need to make a claim against the transferring scheme. The question of how to deal with non-mirror-image bulk transfers was not tackled in the judgment.

The series of judgments in respect of the Lloyds schemes has answered many long-standing questions around how GMPs should be equalised. It is worth noting that the court’s findings are applicable to pension schemes governed by the law of England and Wales: whether those principles can or should be applied in relation to Scots law schemes would, we suggest, merit consideration on a case-by-case basis. However, we are aware that some Scots law schemes are now looking to implement a GMP equalisation process which mirrors industry practice elsewhere in the UK.

On that note, this latest ruling on past transfers should not de-rail any existing GMP equalisation exercises which have been commenced following the 2018 Lloyds judgment. We expect that most trustees will seek to prioritise existing members and then move on to deal with past transfers: much will depend on trustees’ and administrators’ capacity to handle both exercises. There are still a number of unanswered questions on past transfers (such as the extent to which trustees must be proactive, and the extent to which enhanced transfer value exercises should be revisited), but the ruling should help trustees to have reasonably well-informed initial discussions with advisers.

We also understand that the Pensions Administration Standards Association (PASA) are discussing the preparation of guidance following the latest ruling: that would likely be of great value to trustees.

Many employers will also be urgently considering whether the decision will have an impact on their accounting balance sheets – particularly where they would otherwise be due for sign-off in the course of December.

Finally, we await word on whether the ruling will be appealed: watch this space.