32: High Court confirms that DB schemes must top up historic cash equivalent transfer values for the unequal effect of GMP
Further judgment has been handed down by Mr Justice Morgan in Lloyds Banking Group Pension Trustees Limited v Lloyds Bank plc and Others on 20 November 2020. This judgment confirms that trustees of defined benefit (DB) schemes must revisit historic transfers from their schemes and top up cash equivalent transfer value (CETV) payments that were not adjusted for the unequal effect of GMP. Failure to do so could put trustees at risk of members seeking a court order for compensation to be made in respect of any underpayment.
The judgment follows Mr Justice Morgan’s original decision in October 2018 that required DB schemes to address inequalities in scheme benefits as a result of GMP accrued between 17 May 1990 and 5 April 1997. Many schemes have started this work and will now need to extend the process to consideration of historic transfer payments.
The judgment is also likely to make trustees reconsider their position on historic transfers where they may have previously taken a reactive approach to dealing with any known underpayments not related to GMP, for example, where pension increase or revaluation rates were found to have been incorrectly applied for a number of years and the transfers were made before that discovery. Trustees who are in the process of winding up their schemes will also no doubt want to understand their scheme circumstances and how best to remedy any issues to avoid an extended delay to completion of the winding up.
What is covered in this judgment?
Cash equivalent transfer values:
- Mr Justice Morgan has ruled that trustees owed a duty to a transferring member to make payment of a cash equivalent transfer value that was correctly calculated and which reflected the member’s right to equalised benefits;
- a trustee has committed a breach of duty by making an inadequate transfer payment. Trustees of transferring schemes are not discharged from liability for that breach by any statutory provision, by any scheme rules or by an express agreement with the transferring member;
- a transferring member is entitled to seek a remedy against the transferring trustee, including an order from the court that the trustee belatedly pay the correct transfer payment. A claim is not time barred under a scheme’s forfeiture provisions or the Limitation Act 1980;
- the Trustee is able belatedly to perform its duty even without an order of the court;
- where the transfer payment was inadequate the trustee is under an obligation to make a top-up payment to the receiving scheme on behalf of the transferred member. A member cannot require the trustee to provide a residual benefit instead and the trustee cannot offer such a residual benefit in place of a top up;
- any top-up payment to the receiving scheme should reflect the shortfall due at the date of transfer with interest at 1% pa above base rate simple;
- Mr Justice Morgan did consider circumstances where it might be appropriate to pay compensation in lieu of a top up payment but did not make a declaration on this. There will be a number of issues to consider here; and
- trustees of receiving schemes to which inadequate transfers were paid are also under an obligation to adjust benefits for the unequal effect of GMP.
- where trustees have made bulk transfers in accordance with the preservation of benefit legislation such transfers are often ‘mirror image’ ie the receiving scheme provides the same benefits as those provided under the transferring scheme. In that case, Mr Justice Morgan declared that transferring members do not have a claim against the transferring trustees and the receiving scheme will need to adjust benefits for the unequal effect of GMP; and
- bulk transfers that were not ‘mirror image’ will need careful consideration.
Rule based (non-statutory) transfers:
- where a payment was made under a power conferred by the rules of the Scheme and the transfer was made in accordance with the preservation of benefit legislation, the transferring member cannot claim against the trustee unless the court sets aside the exercise of the power; and
- this could only happen if the trustee had committed a breach of duty when exercising the power and to establish this will require an analysis of the relevant rule and circumstances at the time. Trustees will need to consider the rules of their scheme and decision making to determine the extent to which they could be subject to a successful claim.
What action should trustees take now?
Trustees of DB schemes that provide GMPs accrued between 17 May 1990 and 5 April 1997 will already be taking steps to adjust benefits for the unequal effect of GMP.
Transferring trustees will now need to work with their advisers to establish the extent of their obligation and determine a reasonable and proportionate way to deal with this new development.
In terms of how proactive trustees should be, Mr Justice Morgan stated that all he could usefully say is that trustees must be proactive in considering the rights and obligations he identified, the remedies available to members and the absence of a time bar and then determine what to do.
Trustees of receiving schemes will also need to take steps to adjust the benefits provided by transferred benefits that contain GMP accrued between 17 May 1990 and 5 April 1997.
The judgment is likely to have wider implications for any schemes where there may have been underpaid cash equivalent transfer values for reasons not related to GMP.