Insurers called to protect trustees against GMP claims

The judgment in the Lloyds case last year provided some additional clarity on the question of GMP claims in relation to past transfers, specifying that contracted-out, salary-related schemes that paid statutory cash equivalent transfer values during the GMP equalisation period could be required to top up those payments.

It prompted the Pensions Administration and Standards Association to update its GMP guidance, which explained that a top-up payment would be required “to the extent the transfer value actually paid would’ve been higher at the time of payment had the value of the member’s benefits and the mix during the equalisation period between GMP and excess been that of a comparator of the opposite sex”.

It also clarified that there is no limitation period for transfers out, and that the wording of forfeiture rules and member discharges did not apply.

It remains to be seen what steps insurers will expect trustees to have taken to obtain protection from liabilities that are obscured by data gaps, but working closely with their advisers and following industry guidance is an important step for now

Alexandra Heggie, Squire Patton Boggs

Trustees need protection

However, PASA’s guidance went on to explain that a number of practical hurdles remain to implementing the Lloyds judgment, while there is uncertainty as to the precise obligations placed on receiving plans and trustees.

In a blog post published last year, Eversheds Sutherland partners Jeremy Goodwin and Emma King explained that transferring trustees potentially remain “on the hook”.

“The law gives transferring trustees a statutory discharge if they have ‘done what is needed to carry out’ a statutory transfer request. The judge in Lloyds 3, however, concluded that this could not be relied upon to give a discharge where the trustees had paid a lower transfer value than that to which the member was actually entitled (because of GMP equalisation),” they wrote.

Even where scheme rules contain a discharge on transfers, this “will not help” in relation to statutory transfers because scheme rules cannot override legal obligations, they explained, adding that even where members have waived an entitlement to “any further benefit from the scheme”, this “does not cover any entitlement to require the trustees to make a top-up payment to the receiving scheme”. 

“The forms did not discharge the obligation to make the top-up payment,” they added.

This point was picked up on in a blog post published on Thursday by Alexandra Heggie, associate at Squire Patton Boggs, who explained that the problems will be particularly acute for trustees of schemes in the process of winding up, who face a number of “tricky issues”.

These include the question of what happens when there are gaps in historical records, which make it impractical if not impossible to identify and address all top-ups that need to be paid; what happens if a member cannot be traced, or does not engage with trustees; and how to cope where schemes have complex histories involving multiple mergers and restructurings, making the “in scope” population difficult to determine, she wrote.

“When securing benefits with an annuity provider, it seems unlikely that trustees will benefit from a statutory discharge in respect of liabilities to pay GMP equalisation top-ups that they have been unable to distribute to the relevant beneficiaries,” she continued.

“It also seems unlikely that publishing statutory section 27 notices will provide protection against any claims arising post-buyout (even where the historical records are hazy), because statutory notices do not provide protection against so-called ‘known unknowns’.”

A section 27 notice is normally used by trustees before a scheme winds up, placing statutory notices in relevant publications – for example, local newspapers, trade journals, as well as the London and/or Edinburgh Gazette – to put members on notice of the event and that they should provide details if they believe they have benefits within the scheme that have been overlooked.

The lack of statutory protections is likely to mean that the insurance industry will have to “play a significant role in providing protection for trustees against GMP equalisation-related claims following the termination of a pension scheme”, Heggie said. 

“In cases where a top-up is, or may be, due but has not been paid at the point of termination, will it be sufficient for the trustees to disclose the existence of the possible claim? Or will insurers expect them to have taken measures to arrange payment before cover will be provided?”

Insurance industry to the rescue

Heggie told Pensions Expert that trustees of ongoing schemes will continue to enjoy the protections afforded by their scheme rules, but the insurance industry “is likely to come into play at the point of buyout when protections under scheme rules will fall away”. 

“The proverbial million-dollar question is what this protection will be, and we understand the insurance industry has yet to form a consensus on what policy terms will look like in a post-Lloyds world,” she said. 

“It remains to be seen what steps insurers will expect trustees to have taken to obtain protection from liabilities that are obscured by data gaps, but working closely with their advisers and following industry guidance is an important step for now.”

She added that though it is possible these issues may be resolved in future court cases, “any such judgments would relate to the pension scheme(s) in question and so could never fill all the possible gaps in the legal position”. 

“The issues are so varied and complex, and the topic so potentially sensitive, that the government is also unlikely to step in to fill in the gaps via legislation or guidance.”

In the interim, “data issues will mean that most trustee boards will need to make some pragmatic decisions”, Heggie continued.

“This may well include making sensible and justifiable estimates or approximations, or even doing nothing if the data is missing and impossible to obtain or recreate. [PASA’s guidance] sets out some pointers on some of the practical approaches that could be taken where there are gaps in the data, but it is important for trustees to discuss the specific circumstances of their scheme with their scheme actuary, administrators and lawyers.”

Sackers partner James Bingham told Pensions Expert that it is “the nature of pension schemes that it is often impossible to have completely accurate data and the historic nature of the records will mean that some members cannot be identified”.

“Where members cannot be found due to gaps in records, inability to trace, or simply as a result of corporate reorganisations and a lack of historic information, trustees can only do their best to pay out the benefits that they are able to calculate to the people they can locate,” he said.

“As long as trustees have undertaken a proper process, taken advice on the steps they might take, and the appropriateness of their actions and acted reasonably in their decision-making it is unlikely that a court would find they had acted in breach of trust.”

Bingham added that, while it is “theoretically possible that an application might be made to court if a scheme had a systemic problem which affected a large number of members and concerned a significant sum of money”, in reality “we would expect this will not be subject to judicial consideration”.  

“Trustees will continue to have to balance taking steps to locate and identify beneficiaries with the need to act proportionately and not throw good money after bad,” he said.