The High Court has concluded that transfers from occupational pension schemes should have been calculated to allow for equalisation of Guaranteed Minimum Pensions (“GMPs”).
In October 2018, in a case concerning the LloydsTSB pension schemes, the High Court held that benefits from occupational pension schemes needed to be equalised to allow for the inequality in the way GMPs are calculated. Further information about the original judgement can be found here. In the original judgement, Morgan J acknowledged that he had left the question about transfers out unanswered. This means that since October 2018, schemes have been in limbo while this further judgement on the question of transfers out has been awaited.
Statutory transfers? Does the statutory discharge apply?
In the latest judgement, the court considered the application of statutory transfer rights as well as non-statutory transfers out. Under the Pension Schemes Act 1993, members may have a right to ask scheme trustees for a statement setting out the value of the benefits they have accrued in the scheme, with a view to then requesting that the cash value of their pension is transferred to another pension scheme or insured arrangement. This is commonly called the “cash equivalent transfer value”.
The way in which the cash value of a member’s pension benefits are calculated as a capital sum, is set out in legislation. The statutory transfer process provides transferring trustees with a statutory discharge of liability in relation to the transferring member. Application of the statutory discharge of liability was one of the points considered in the case.
The legislation governing transfer values has changed over time and the High Court considered the various iterations of the transfer value legislation that have applied since 1990. The High Court concluded that transfer values should have been calculated to allow for GMP equalisation. This was the judge’s overall conclusion regardless of which version of the legislation was being considered.
Morgan J concluded that the effect of calculating a transfer value without allowing for GMP equalisation is that the calculation was wrong and that the consequent transfer value was too low. He also concluded that the statutory discharge of liability that trustees otherwise benefit from does not apply. Consideration was given to the forms completed by members and he also concluded that any discharge of liability signed by members did not absolve the trustees from responsibility.
How to remedy underpaid transfer values
He then turned to the question of what trustees would now have to do, would they have to remedy the erroneous calculation? The answer to this was yes. Morgan J concluded that the trustee’s breach of duty, in underpaying the transfer value, was unremedied and that a court could order the trustee to make a top-up payment in order to fulfil its duty to the member.
The question of interest was also raised, clearly if a member’s transfer payment to a defined contribution scheme was underpaid, then a member will have missed out on the investment return in respect of the shortfall in the transfer value. Morgan J concluded that interest on any top-up payment would be applied at the rate of 1% above base rate. This reflects the original judgement.
In ruling out the option for members to produce evidence of actual loss, Morgan J acknowledged the fact that top-up payments will be modest and that calculation of these payments will involve considerable time and expense in calculating the top up. He recognised that in many cases the cost of the exercise will exceed the actual top up amounts.
How to apply the underpayment
Given that the residual liability arose in relation to someone who was no longer a scheme member, Morgan J was asked to consider how that liability should be satisfied. Options included: making a top-up payment to the receiving scheme; providing a residual benefit within the transferring scheme; making a payment directly to the member.
Morgan J concluded that transferring trustees are required to make a top up payment to the receiving scheme. He does however say that it would be open to transferring trustees and former members to agree to an alternative to the trustee making a top-up payment. This does leave open the possibility of applying the latter two options, with the former member’s agreement.
Should trustees be proactively revisiting transfer payments?
The parties’ view was that if the obligation to the transferring member was to make a top-up payment to the receiving scheme, then the trustee was obliged to proactively perform that obligation. Morgan J agreed within this conclusion. This means that trustees cannot simply sit back and wait for historic members to contact them, they need to take steps to provide the necessary redress. This of course assumes that records of members who have transferred out have been retained.
The judgement also concluded that transferring members would not be limited in time for making such a claim. This means that there is no cut off for transfers which took place before a certain date. This is different to the position for equalising benefits payable from a scheme where the original judgement concluded that it might be possible to apply a scheme’s forfeiture rules to limit arrears of payments.
Transfers under scheme rules
Morgan J considered the application of individual transfers which fell within the scope of the scheme’s transfer rules and not within the scope of the cash equivalent transfer legislation. His conclusion was that a transferring member no longer had rights under the transferring scheme unless the court set aside the trustee's exercise of the power. His conclusion was that a transferring member could ask the court to set aside the trustee's earlier exercise of the scheme transfer power if the trustee had committed a breach of duty when exercising the transfer power. However, he did not then conclude whether or not a breach of duty had occurred under the schemes in scope, simply that an investigation of the relevant circumstances would be needed.
Morgan J did not consider the position in respect of bulk transfers from one scheme to another. However, there was one specific question he was asked to consider and that was whether, in the case of a mirror-image bulk transfer, the transferring trustee is discharged from an obligation to equalise by virtue of the bulk transfer legislation. He concluded that on a statutory bulk transfer, the transferring trustee is discharged from any further liability.
A receiving scheme is liable to equalise benefits in relation to transferred-in members, even in relation to benefits which accrued prior to the transfer. This is a long established requirement of equalisation. In a bulk transfer which relates to part of a scheme only and where GMPs have not been equalised before the transfer, this may mean that the transfer value has been understated. Before deciding whether to revisit this with the transferring scheme or the transferring employer, a receiving scheme trustee would need to review the terms of transfer deed.
In implementing GMP equalisation, schemes should ensure that historic transfers are covered in any project plan. While the first priority is likely to be to correct current pensions in payment, it is clear from the latest judgement, that transfer payments will need to be revisited. The first step will be to identify any cases from the last 30 years where members had pensionable service between 17 May 1990 and 6 April 1997.
For further information, please contact Suzanne Burrell or your usual Shoosmiths contact.