33: The latest Lloyds decision – implications for the use of pragmatism and proportionality by pension trustees

In Lloyds Banking Group Pension Trustees Limited v Lloyds Bank plc and Others on 20 November 2020 (Lloyds) Mr Justice Morgan confirmed 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 to enforce payment of a top-up or other compensation 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. However, this latest judgment has implications for trustees of DB schemes beyond GMP equalisation, particularly where trustees know an individual would be entitled to an increase in benefits because of an historic error in how their scheme was administered but for the fact that the member transferred out or died before the error was remedied. This note considers how the latest Lloyds decision may impact on decisions may have taken about these situations in the past and whether they may need to be revisited.

The issue

Lloyds confirms that trustees owe a duty to a transferring member to make payment of a cash equivalent transfer value that is correctly calculated and reflects the member’s right to benefits accrued under the scheme. A trustee has committed a breach of duty by making an inadequate transfer payment and importantly, 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 (the latter was based on the specific agreements in the case but it is likely that many schemes will have used similar discharge wording and so have the same issue). We see no reason why this breach of duty does not apply equally to underpayments made to members who have subsequently died.

Irrespective of how well they are run, many schemes will have discovered that the way in which they administer member’s benefits were incorrect at a certain point in time (setting aside GMP equalisation). Common examples are where pension increase rates or revaluation rates were found to have been wrongly applied, where the wrong definition of pensionable salary had been used to calculate benefits or where a scheme thought that it had implemented closure to accrual or Barber equalisation of equal normal retirement ages from a certain date only to find that a later date should be used.

In those cases, trustees will set about adjusting benefits for members, paying arrears to current pensioners and their spouses, and ensuring that the scheme is administered correctly going forwards. However, difficulties often arise where the scheme thought that it had discharged liability for a member via a transfer payment or the member had died before the incorrect practice was remedied, and the member would have been due an increase if they had not transferred or died. In those cases, scheme data may not be up to date and the anticipated costs of remedying the situation may be more than the potential payment to the member and so trustees may have decided to take a ‘reactive’ or passive approach to remedying the situation for these ex-members – they wait for the members to bring a claim.

The latest Lloyds decision raises some interesting questions for trustees about the extent of their obligations to such ex-members in respect of GMP equalisation but also in these other underpayment situations.

What has Lloyds said about the requirement to be proactive

In reaching a decision to take a reactive approach to past underpayments, trustees must first consider what duty (if any) they owe to the ex-member. If they continue to owe a fiduciary duty to the ex-member then they should take all reasonable steps to locate them (or their estate) and make a top up payment. However, if they do not owe a continuing fiduciary duty then they can potentially wait to see whether the ex-member (or the estate) brings a claim and then react to that claim.

The Lloyds decision confirms that when a trustee made an inadequate transfer payment in the past, the trustee committed a breach of fiduciary duty but that duty was broken once and for all at that point and there is not a continuing fiduciary duty to seek and make a top-up payment. This may come as some comfort to trustees that have reached a reactive position in the past, however Mr Justice Morgan does state that the trustees in Lloyds should reflect on the fact that there is no discharge from liability and no time-bar on claims and then consider what action they should take. The Lloyds decision has not changed that analysis but it does seem to have raised the bar in respect of what is reasonable for the trustees to do.

What has Lloyds said about proportionality

As part of their decision making in respect of historic transfers and death, it is not uncommon for trustees to undertake cost/benefit analyses to determine what steps it is proportionate to take in tracing ex-members or the estate of deceased members. Where there are difficulties, for example a lack of historic data, arguments as to proportionality can further encourage trustees to take a reactive position in these cases.

In the latest Lloyds decision it was recognised that the costs of seeking out ex-members could exceed the amount of the top-up payments. While Mr Justice Morgan makes an allowance for this fact by limiting the rate of interest he determines should be paid on top-up payments, he does not give any clear guidance to trustees on the extent to which they can and should factor proportionality into their decision making about whether to reactive or proactive. This is because the parties asked the court not to rule.

There is no one-size fits all answer to proportionality – it will depend on the circumstances of each case but the Lloyds decision has raised expectations as to the steps trustees should take in order to gather all of the relevant data and information in order to assess proportionality. Where a broad-brush approach may previously have been adopted, this seems less reasonable following the latest Lloyds decision and trustees may perhaps need to take greater steps to gather relevant data and make a more informed, case by case decision.

What should trustees do now?

The Lloyds decision is concerned with the obligation to top-up transfer payments where they have been underpaid for the unequal effect of GMP. However, it does bring into focus decisions that may have historically been made about other underpayments, especially where a scheme is close to buy-out and winding up and trustees won’t be around to react to future claims. While what is reasonable will be particular to each scheme, the latest Lloyds decision does raise questions about the extent of the obligation for trustees to investigate and make efforts to remedy historic underpayments and to consider again whether they have done all that is reasonable in the circumstances.

In terms of both GMP equalisation and other systematic historic underpayments, trustees will need to establish:

• if there is sufficient data to establish the extent of detriment: the amount of loss suffered and whether it can even be established is and remains a key factor in trustee decision making;
• whether ex-members can be contacted either to establish where a top-up payment should be made or whether they (or their financial advisers) may be able to provide relevant benefit information to help fill gaps to help establish the amount of any detriment: scheme records will be the starting point but trustees may also wish to consider whether it is possible to use outside agencies to trace members. The same applies to tracing the relatives of deceased members;
• whether it is possible to obtain insurance against undischarged liabilities in light of the steps that have been taken to remedy underpayments and whether enough has been done to meet underwriting requirements; and
• the extent to which the trustees have protection under exoneration or indemnity provisions in their scheme’s rules in their circumstances: it may be that greater efforts are needed in order to ensure that the trustees benefit from those protections.

We can help trustees negotiate the legal implications of Lloyds and establish practical plans for dealing with any issues.