GMP equalisation update – a realistic solution?
When it comes to Guaranteed Minimum Pensions equalisation (“GMPe”) on past transfers, the new PASA guide does a good job of explaining the total mess schemes find themselves in as a result of the 2020 Lloyds judgment and how trustees of transferring schemes who need to pay up a top up might be discharged in a practical and pragmatic way. It can’t offer a simple solution for all schemes, however, because this will be partly dependent on scheme specific factors.
Essentially trustees of contracted-out DB schemes who paid transfers in respect of pensionable service between May 1990 and April 1997 (without any allowance for equalising GMPs) may not have paid the correct amounts to receiving schemes, especially in relation to statutory transfers. Trustees may not need to revisit non-statutory or bulk transfers to mirror image schemes but trustees should take advice before relying on these exceptions.
Transferring trustees who have not paid the correct amount will need to decide what they can reasonably do to pay the right amounts. This is unlikely to be straightforward as some of the transfers may have taken place many years ago. For trustees to decide on the right policy for their scheme they will need to interrogate the information they hold on past transfers. Do they have the basics; data to do the calculations, details of where the transfer payment was paid and contact details for the member?
Where only a few ex-members need top-ups it may be feasible to deal with them on a case by case basis assuming the data is available to do this. However, where there are more than a handful of top ups that need to be paid, the cost of tracing, getting authority, corresponding with the ex-member and receiving arrangement, and implementing the top-up if one can be made, can easily outweigh the amount of the top-up. Occasionally a top up payment is a significant amount but in most cases this will not be the case.
Trustees need to be proactive and whilst the judge in the Lloyds case did not prescribe the steps trustees need to take (as was the case for GMPe methodology), as the PASA guide notes he appears to say that trustees can take account of the costs in deciding on their approach. This seems to have been endorsed in the recent Axminster case in connection with a benefit correction exercise where the judge said “what is required is a rational and proportionate response to the administrative difficulties”.
Calculations need to be done as best they can be and based on reasonable assumptions to fill in data gaps. Schemes that have done GMP equalisation for current members have a head start as they know the profile that makes a top-up likely based on their own benefit structure.
There is no statutory limitation period for these underpaid transfers and interest is due on the payments. Forfeiture provisions may provide some limitations although this is very much dependent on the wording of the relevant clauses and is another case of drafting lottery that seems to affect pension schemes. As it happens the forfeiture clauses and the discharge wording considered in Lloyds did not assist in limiting any back payments and the PASA guide does not expect most forfeiture rules or member discharge provisions to apply in these circumstances.
Trustees then need to decide where to pay it. It may be easy to pay the receiving arrangement, or impossible. The situation may be unclear. The top-up is not a benefit and it’s due to a third party (the receiving scheme) not to the member so tricky to validly commute. The Trustees need to find ways to pay out this top up amount that they can control but it looks like getting a neat and tidy discharge is going to be a challenge for the transferring trustees.
Read Kate’s article in Pensions Age. A different version of this article has also now been published in Employee Benefits.
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.