As we previously reported, the High Court has ruled that trustees are required to equalise male and female members’ benefits for the effect of guaranteed minimum pensions (GMPs).
Subject to an appeal by any of the parties to this judgment, trustees and sponsors need to take prompt action to implement equalisation in their schemes. However, there are a number of preliminary steps that they will need to take before they are in a position to do this.
It is likely to take several months for trustees to decide how to implement equalisation. In the meantime (and even before the appeal window closes), trustees need to take immediate action to determine whether to adjust transfers and other lump sum payments that fall due before they implement equalisation. Where relevant, trustees will also need to consider the impact on buy-ins and buy-outs.
Sponsors will also need to decide, together with their auditors, how to reflect the financial impact of this decision in their corporate accounts.
In Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank Plc, the High Court was asked to decide a number of important issues. The central questions were:
- Whether the trustees of three of Lloyds Bank’s defined benefit pension schemes were required to equalise male and female members’ pension benefits for the effect of GMPs?
- If so, how should they implement this?
In short, the Court has ruled that trustees are required to equalise members’ benefits for the effect of GMPs. They are also required to make back payments to make good historic underpayments (subject only to any limitation on back payments under a scheme’s rules).
In considering how equalisation should be implemented, the Court rejected the most generous approach to equalisation, approving instead several lower cost alternatives. However, trustees must now decide, together with their scheme’s sponsors, how to implement equalisation in the context of their scheme.
For a more detailed summary of the judgment and its implications read our previous ebulletin.
Which schemes are affected?
The judgment impacts all schemes which were contracted-out between 17 May 1990 and 5 April 1997 and which provide GMPs.
Actions for trustees
Trustees of affected schemes need to take prompt action to equalise the benefits of members entitled to GMPs. However, before they can do this they first need to:
- obtain legal advice on the implications of the judgment for their scheme, including advice on the most appropriate method for achieving equalisation under their scheme, the options for adopting a simplified approach (see below) and the period over which back payments will need to be made (based on the rules of their scheme)
- complete any outstanding GMP reconciliation exercises
- commission a review of scheme data to determine whether they have all of the data necessary to equalise the benefits of affected members (this is likely to be a key practical issue for many schemes)
- ask the scheme actuary to estimate the cost of equalising members’ benefits using the various methods approved by the Court
- assess the costs and practicalities associated with the various equalisation methods (including the scope for simplification) and agree the approach to be taken with their scheme’s sponsor, and
- agree with their scheme’s sponsor how the funding impact on the scheme (arising from the additional liability and the increased administrative costs) will be addressed.
Reaching a decision on how to equalise benefits will be an iterative process with many of the steps outlined above needing to be run in parallel and being informed by the others. Trustees will require a combination of legal and actuarial advice and input from their scheme’s administrators throughout the process.
Alongside this, trustees need to decide when and how to communicate with members regarding the Court’s decision and how they are responding to it.
Scope for simplification?
Before settling on their approach to equalisation, trustees and sponsors may want to consider the scope for simplifying matters and, in particular, avoiding the need to assess and, where necessary, equalise members’ benefits on an annual basis (which is a feature of the approaches to equalisation approved by the Court). The options include:
- making a one-off adjustment or payment to compromise the claims of some or all of the affected members, and
converting members’ GMPs into equalised main scheme benefits, thereby avoiding the need for an annual reconciliation exercise to be carried out in the future.
An important question that this judgment did not answer, is the extent to which trustees are required to make top-up payments to members who have previously transferred out of a scheme. That question has been left for another day.
However, an immediate question that trustees do need to consider is how to handle transfer payments that fall to be made between now and when members’ benefits are equalised.
In our view, there are four main options which trustees could consider:
- continue to make transfer payments as previously and, where necessary, make a top-up payment once they have decided how to implement GMP equalisation in the context of their scheme,
- where member data allows, enhance transfer payments based on method C2 (as it is referred to in the judgment) – even if this is not the method that is ultimately used to equalise benefits under the scheme as a whole, the Court has confirmed that trustees are entitled to unilaterally adopt this method to implement equalisation,
- provide a “rough and ready” enhancement to transfer payments which take account of the need to equalise, inform the member of this and obtain a discharge from them in respect of any (as yet uncertain) additional benefits to which they may be entitled, or
- provide a “gold-plated” top-up to transfer payments to avoid the risk of transferring members being underpaid – a discharge from the member could also be sought to reduce the risk of any future complaint / claim. This option is likely to require the consent of the scheme sponsor.
Before deciding which approach to take trustees ought to:
- check how many requests for transfer value quotations and transfer payments are in the pipeline and what the current status of them is
- obtain actuarial advice on the feasibility of the options outlined above and an estimate of the impact that equalising benefits for the effect of GMPs is likely to have on transfer values that are in the pipeline (as this may inform which approach is most appropriate and it will impact the nature of the communications with transferring members).
Whichever option is chosen, trustees need to consider carefully how to communicate with transferring members, with particular care being taken in relation to any discharge that members are asked to sign. In any communication, trustees could also give members the option of delaying their transfer until after the uncertainty over their entitlement is known. However, this too, is not without risks.
Trustees may want to suspend transfer quotes and payments temporarily (e.g. for a week or two), while they obtain advice on these issues and decide how to proceed. However, this may not be appropriate if the statutory deadline for providing transfer quotations or payments will expire within this period and advice should be sort on the options in this scenario.
Given the strict statutory deadlines for providing transfer value quotations and for making transfer payments any suspension should be kept as short as possible and, in any event, we do not think that it would be appropriate for trustees to suspend transfers indefinitely while they work out how to implement equalisation for the scheme as a whole.
Other benefit payments
As well as deciding how to deal with transfer payments, trustees also need to consider the impact on any trivial commutation lump sums or any other lump sum payments that are in the pipeline.
Actions for sponsors
Sponsors of affected schemes will want to understand the immediate and ongoing funding implications for their scheme of the various ways of implementing equalisation and the scope for adopting a simplified approach. They should engage with their scheme’s trustees in this regard and to agree the approach to be taken.
Sponsors also need to determine whether they will need to make provision for any funding impact in their next annual accounts or whether a disclosure will suffice at this stage.