In October 2018, the High Court handed down its landmark judgment in Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank PLC and others. As the first anniversary of the date of the judgment approaches, we look at what has happened in the last year and what trustees can do now.
What was the Lloyds case about?
In the Lloyds case, the High Court ruled that:
- trustees have a duty to equalise benefits for the unequal effect of GMPs;
- the duty to equalise applies in relation to GMP accrued between 17 May 1990 and 5 April 1997;
- there are a number of potential methods for equalising for the effect of unequal GMPs;
- where it becomes clear that benefits have been underpaid, there is no statutory time limit on the number of years over which a member could look back to bring a claim. However, there might be a limitation in the scheme rules (for example, a rule which says that a member cannot claim benefits unpaid for more than 6 years); and
- where arrears are paid, simple interest at 1% above base rate should be applied.
To which schemes does the Lloyds judgment apply?
The Lloyds judgment affects pension schemes which contracted-out of the State Earnings Related Pension Scheme (SERPS) between 6 April 1978 and 5 April 1997 and so must provide a guaranteed minimum level of pension (GMP) to members.
It is most relevant to schemes which are not in a Pension Protection Fund assessment period. This is because schemes in a PPF assessment period are already required to equalise GMPs using the PPF’s method. However, a scheme in a PPF assessment period which discovers that benefits have been underpaid in the past, will need to consider the section of the judgment relating to time limits on arrears.
What has happened since the Lloyds judgment was handed down?
Many trustees will have taken steps to address the immediate questions raised by the judgment. For example, what to do about retirements, transfers out and requests to commute benefits or take a serious ill health lump sum where the member has any 1990 – 1997 GMP.
Employers and trustees will have needed to decide how to address GMP equalisation in accounts and, in some cases, valuations. Some may also have taken legal advice on whether the scheme’s trust deed and rules contains a ‘forfeiture’ rule and, if so, how this will apply.
To support schemes who are considering using GMP conversion as a way of achieving equalisation, the DWP has released guidance on a 10 stage conversion process. The Lloyds Banking Group Pensions Trustees Limited has also announced that a court hearing on the question of whether trustees have a duty to revisit past transfers out, is expected to take place at the end of April or beginning of May 2020.
However, trustees might feel that it is difficult to make any more progress with GMP equalisation until they have completed their GMP reconciliation exercise and HMRC has confirmed how adjustments to benefits for GMP equalisation will be treated for pensions tax purposes. The pensions tax questions range from how any equalisation adjustment will be treated for annual and lifetime allowance purposes, through to whether an adjustment could result in loss of protection.
What can trustees do now?
HMRC has said that it might be in a position to release some initial guidance on pensions tax issues this Autumn.
In the meantime, trustees might find it helpful to read the two guidance documents which have been released by the industry-wide working group on GMP equalisation. These are a ‘Call to Action’ (which sets out a number of actions that trustees can consider taking now) and a guidance note on questions which the judgment did not address, but which will need to be considered in connection with a GMP equalisation project.
Open Trustees comment
The industry-wide working group’s Call to Action and first guidance note are both helpful documents. The trustees of schemes which are not in a PPF assessment period might like to discuss the notes with their advisers and agree what steps they can take, now, to help to prepare for their GMP equalisation project. They might also like to look out for further guidance from the industry working group, and from HMRC on the pensions tax issues.
30 September 2019