DWP steps in at Lloyds’ GMP past transfers hearing

Patrick Halliday, counsel for the Department for Work and Pensions, was one of the parties heard by the High Court on May 11 in its second hearing of the Lloyds GMP case, stemming from a previous 2018 judgment.

GMPs were created due to contracting out, which meant DB schemes could prevent their members tripling up on pension benefits by building up a basic state pension – state earnings-related pension scheme – and an earnings-related occupational pension. In exchange for giving up Serps, both employees and employers paid less national insurance contributions.

But as a consequence of the different treatment of men and women in state pensions being ruled discriminatory under EU law, in October 2018 the High Court ruled that Lloyds Bank scheme trustees must also equalise benefits between women and men who have GMPs.

For many schemes, the administrative costs associated with such an exercise will be more significant than the liabilities at stake, so it is to be hoped that the judgment will leave it open for trustees and employers to take a pragmatic approach

Stephen Scholefield, Pinsent Masons

The ruling was considered a solution for a pension problem spanning almost three decades, and schemes are now having to decide how to equalise the contracted-out benefits of their members.

However, questions remained over past pension transfers, which although part of the original application to the court were not ruled on by judges. Lloyds trustees requested a second hearing in June 2019, which took place last week.

DWP counsel disagrees with Lloyds’ position

According to reporting service Law360, the DWP said Lloyds’ submission that a trustee can be exempt from any obligation to top up former employees’ benefits that were subject to discrimination claims is "contrary to public policy”.

Mr Halliday argued: “Where the transferring trustee has miscalculated the cash equivalent, it has a statutory obligation to correct the calculation and pay a top-up payment accordingly, even after the transfer has taken place.”

Lloyds argued that any obligation on the trustee to top up past transfers is now discharged, or that former members have missed their window of opportunity to dispute it.

The DWP believes that this position goes too far, since it would prevent a member from having any legal recourse against their former employer for any unlawful under-calculation of a transfer payment, regardless of the reasons.

Law360 reported that Mr Halliday took particular issue with the period of time in which members could challenge their entitlement, calling the bank’s argument that domestic law on limitation trumps employees’ EU rights “misconceived”.

Lloyds argues responsibility lies with receiving scheme

According to Angela Burns, consulting actuary at Spence & Partners, Lloyds’ lawyer argued that the bank is relieved of any duty because of the Coloroll judgment – a case brought before the European Court of Justice in the 1990s.

The judgment said that in the event of the transfer of pension rights, the receiving scheme would be responsible for topping up the transfer value in “consequence of the inadequacy of the capital transferred, this being due in turn to the discriminatory treatment suffered under the first scheme”.

Ms Burns said: “If a member brought in a transfer value of £100,000 and it should have been £102,500, then it is the receiving scheme that is on the hook (subject to any indemnities it may have asked for) and the receiving scheme must treat the member as having brought in £102,500.”

She noted that while the judgment may be a few months away, “it is worth noting that the judge found the idea of liabilities being imposed on a person not responsible for wrongdoing – ie, the receiving scheme – to be ‘baffling’”.

Robert Walker, senior associate at Arc Pensions Law, explained that as things stand, "it's not clear how any additional liability should be discharged nor what the underpayment means in practice for trustees". 

"When the original transfer took place the member may have signed a formal discharge in favour of the trustees against any further liability. In addition, the trustees may have indemnified the receiving scheme on the basis that the receiving scheme would equalise benefits. Also, there may have been subsequent transfers and the initial receiving arrangement may have been discharged/no longer exist. Trying to unpick who is liable to whom and for what may not be straightforward."

Schemes advised to ‘wait and see’

According to Law360, Lloyds said that it would be too administratively difficult if it was required to go back and assess whether former members that have been transferred out are eligible for additional benefits.

This is a scenario that is common to other pension funds, with Stephen Scholefield, partner at law firm Pinsent Masons, suggesting that schemes “should wait to see the judgment before considering the extent to which they need to revisit past transfers-out”.

He said: “For many schemes, the administrative costs associated with such an exercise will be more significant than the liabilities at stake, so it is to be hoped that the judgment will leave it open for trustees and employers to take a pragmatic approach.”

Alasdair Mayes, partner at LCP, has a similar opinion, recommending schemes to wait for the case verdict. He also noted that it is “important to remember that in many cases a transfer value will not have been lower than it would have been had it been equalised”. 

“Even in cases where it was, the sum involved could typically be less than £500. If the High Court rules that cases must be revisited the costs may well outweigh the benefits.”