GMP Equalisation and past transfers-out

25th November, 2020

  • More questions than answers, but doing nothing is not an option.

    A long-awaited follow up judgment on GMP equalisation (GMPE) and historic transfers-out was published on 20 November 2020. The practical implications of the ruling will be very pension scheme specific. The bigger picture, however, is that trustees of many pension schemes will need to revisit transfers out over a 30-year period from 1990 to the present day.

    As background, in October 2018, the Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc and others case confirmed that defined benefit (DB) pension schemes would need to equalise benefits to remove any inequality arising from Guaranteed Minimum Pensions (GMPs).

    Whilst providing clarity around the obligation on trustees to equalise benefits for the effects of GMP (GMPE), the case left several important issues unresolved; not least, liability for past transfers-out of members’ benefits where transfer values have not been adjusted for GMPE.

    This issue of past transfers-out has now been addressed in the second Lloyds Bank pension schemes case, which has confirmed that trustees have a duty to take steps to correct historic cash equivalent transfer values as a result of GMPE and make a top-up payment in respect of the transferring members. The judgment is less clear in terms of how proactive trustees need to be in doing this but, at very least, they will need to consider the impact on their pension schemes.

    The impact of the ruling will be scheme specific and dependent on the number of past transfers-out the scheme has made where GMPs, built up between 1990 and 1997, were included in the transfer value.

    The fact that members signed discharge forms when transferring out does not absolve trustees from the need to reconsider past transfers and unlike the 2018 GMPE ruling, limitation periods do not apply. Transfers as far back as 1990 are in scope even though schemes may not have data going back that far.

    Employers that have not already done so, will need to include a provision in company accounts for past-transfers out that have not been adjusted for GMPE.

    While the judgment provides clarity on the extent of trustees’ obligations to revisit past transfers out when it comes to GMPE, this may prove to very problematic and costly. Many questions are left unanswered by the judgment, meaning trustees will need to work with their own advisers on what the ruling means for them and the options for complying.

    As a starting point, ‘past transfers’ should be added to GMPE projects.

    Action for trustees: following this judgement, trustees will need to quantify how the historic issue of past transfers affects their scheme and agree with their advisers the actions necessary to fulfil their GMPE obligations.

    Action for employers: consider the impact, if any, on company financial statements.

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    • Published bySusan McFarlane

      Susan leads the marketing function for Dalriada Trustees Limited, and our sister company, Spence & Partners.  The marketing team handles all promotional activity for the companies including business development, marketing, events and PR. Susan joined the business in January 2013, having...

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