3: GMP Equalisation Working Group publishes guidance note
Since the Lloyds Bank judgment in October 2018, schemes which were contracted out have known they will need to adjust benefits to equalise for the unequal effects of GMPs accrued between 17 May 1990 and 5 April 1997.
The GMP Equalisation Working Group was set up to help schemes achieve GMP equalisation in a cost effective, proportionate and pragmatic way. They have now issued their first guidance note (the guidance) setting out suggested approaches schemes may wish to adopt to address common issues that the Lloyds Bank case failed to answer, and which may remain unanswered, due to their complexity and the disproportionate costs that would be involved in bringing them before a court.
Some of the key issues addressed in the guidance include:
- de minimis cases – regarding whether schemes can choose not to adjust benefits where the adjustment is below an agreed tolerance level, the guidance recognises that schemes may not want to apply a tolerance level where a benefit is already in payment, as there is unlikely to be any significant cost saving for the scheme in doing so and, for most schemes, they can easily correct benefits as part of their next annual pension increase. In any event, where a scheme is considering adopting a de minimis approach, the guidance states that it should take advice;
- ‘no further liability cases’ (ie where the scheme has finished paying any benefits) – the guidance notes that there are often practical issues with dealing with these cases, including lack of data, difficulty tracing members and tax complications. It comments that, although trustees in conjunction with the employer may take a commercial decision not to pursue these cases, this will not extinguish the scheme’s liability to equalise for the effect of GMPs. Therefore, if following this option, the guidance suggests Trustees write to the last known address of a member or next of kin and also consider insuring this risk where a scheme wind-up is planned;
- limitation periods and forfeiture rules – regardless of whether the scheme rules contain a forfeiture rule limiting past underpayments, the guidance states that there is still a requirement to go back to the day the member left pensionable service to recalculate the opposite sex comparator’s benefits and determine any past underpayments. It also observes that some schemes have agreed to ‘stop the clock’, so any limitation period does not apply to periods after the Lloyds case, avoiding members being adversely affected by delays in achieving GMP equalisation. The guidance makes it clear that legal advice is required as to the effect of any forfeiture rule;
- interest on past underpayments – in the Lloyds Bank case, the court awarded simple interest on past underpayments at 1% over bank base rates. The guidance concludes that, unless the scheme rules prescribe a particular interest rate, it is likely that schemes will follow the same approach taken in Lloyds;
- individual transfers in – currently, the law requires the receiving scheme to increase the benefits of a member who has transferred in if the original transfer value was inadequate. The problem in practice will often be the receiving scheme locating the information it requires in order to establish whether the transfer value was inadequate. The guidance concludes that, on the basis that the receiving scheme will not be in a position to determine this, the onus will be on the affected member to establish this instead.The guidance suggests that, in any event, trustees should take the preparatory steps by identifying any members who may be affected and schemes from which historic transfer payments have been received and, if these still exist, locate any relevant documents and whether they contain a discharge or an indemnity. Legal advice should always be taken with this approach to ensure there are no issues regarding discrimination;
- bulk transfer – the guidance notes that, on a bulk transfer, it is more likely that the receiving scheme will have the information it requires to calculate any GMP increase required. It comments that the schemes may want to see whether any indemnities were given by the transferring scheme; and
- as well as approaches for corrected past underpayments, the guidance also looks at approaches to equalising future benefits. In deciding which approach to adopt, it makes it clear that different approaches can be used for different categories of member. For example, a conversion approach could be used to equalise deferred members’ benefits, whilst a year by year approach could be used for existing pensioners. It also states that schemes should consider the tax implications in deciding which approach to adopt.
Any adjustments of benefits may create tax implications which will be the subject of a further guidance note by the GMP Equalisation Working Group along with a HMRC guidance note. Further guidance by the GMP Equalisation Working Group covering data and reconciliation and rectification is also expected in the coming months. It is expected many schemes will await this guidance before implementing equalisation, although some schemes, such as those winding-up, will need to equalise before then.
In terms of revisiting past transfers out, this will be the subject of a further hearing in the Lloyds case, which is currently expected to take place in spring next year.