The ruling on gender equalisation on defined benefit (DB) pension transfers could mean trouble for the sector.
In November 2020, the high court decided that guaranteed minimum pension (GMP) shortfalls between men and women apply to transfers as well.
This was a follow-up to a 2018 case involving Lloyds Bank regarding pension schemes.
More specifically, the 2020 ruling applied to members who took a transfer value from a pension which included GMP benefits built up between 1990 and 1997.
Jane Briggs, director in the pension team at global law firm Squire Patton Boggs, told International Adviser that pension trustees will now need to look at their records to see whether a member that transferred out during the seven-year period may be eligible for a top-up payment.
Since the decision is quite fresh, however, the process is still at very early stages and “a lot of work will need to be done in terms of reviewing what records trustees of pension schemes have kept over the years”.
Two possibilities
But Briggs believes that most DB transfer activity took place from 2015 onwards, following the introduction of pension freedoms.
If this is the case, there should be “more complete records” for trustees to look back at.
But there are two scenarios to be considered in case members are due a payment, she said.
“The judgement was quite particular, because it distinguished between different kinds of transfers out of pension schemes.
“There are individual statutory transfers, where the individual member had a statutory right to take a transfer value, and if a transfer payment was one of those kinds of transfers, then the trustees of a pension scheme need to be proactive to try and work out whether or not somebody might be due a top-up payment.
“If so, that’s when they have to look back at the data to see whether they’ve got up-to-date contact information or just what data they do have at all to be able to take it further.”
Briggs added that if a scheme member did not have a statutory right to transfer, then the trustees are not responsible for checking whether gender equalisation applies.
“There’s a different kind of individual transfer that is for individuals who didn’t have a statutory right to take a transfer. But under the rules of the individual pension scheme in question, they either could take a transfer or the trustees could use their discretion to allow them to take a transfer.
“In those instances, because they’re not statutory-based, they’re rules-based under each individual scheme, that’s where the individual would need to bring a claim. But primarily, that would be bringing a claim to the court to claim that the trustees have breached their duty under the scheme rules.
“That actually would be a more difficult route to seek a top-up payment, there’s no clear guidance that came out in terms of the court’s decision for trustees to be more proactive in that case.
“Trustees of a pension schemes would need to be careful there because they obviously are bound by the terms of their scheme rules as to what they can and can’t do. So, they might not be able to be as proactive in those instances.
“It’s not always going to be that the action has to be by the former member of a scheme,” she added.
Financial implications
But could the recent ruling result in massive economic liabilities for pension schemes?
Briggs doesn’t believe so.
“I don’t think it would put pension schemes at risk. First of all, you’re looking at the members who have transferred out, so that could be a small proportion of the total membership of a pension scheme.
“Not all of those would necessarily be due a top-up payment, because what you’d have to look at is the GMP, the sex of the person who took the transfer and the opposite sex, and whichever came out higher would be the one that was due.
“It’s not always the case that there would be a top-up due, because somebody might have had a payment that actually already met the equalisation requirements.
“Normally, GMPs form only a small proportion of the overall transfer value. So, for the people who are still members of that scheme has been estimated to be around about 1% of total liabilities.
“When you’re looking at a smaller population of people who have transferred out, as you filter that down to smaller numbers, the additional exposure, I don’t think would be that material overall to pension schemes.”
A matter of information
This, of course, is in the event that a pension scheme has all the data it needs and that it is up to date. But what if the data is full of holes or missing entirely?
Briggs said that this would be something to be considered on a scheme-by-scheme basis, because the trustees are the ones tasked with looking through all the information they have; what, if any, is missing; and whether they can make assumptions on what information they don’t have and come up with an approximate sum as a result.
“There potentially will be some difficulties that are encountered as this process develops and trustees drill down into what data they have and what data they don’t have and can’t get hold off,” she said.
“Where they are in discussions with individuals about potential top-ups, that might lead to some kind of individual settlement, but that, again, will very much depend on a scheme-by-scheme basis for sorting that out.”
A long time ago
The pension industry today has undoubtedly changed from what it was in the 1990s.
So, what happens when a firm has been acquired, merged or has been wound up?
“There’s two slightly different scenarios there,” Briggs said. “Where a company group has merged, or there’s been takeovers, the pension scheme will follow that somewhere, and will still exist and still have an employer as ‘sponsor’ who sits behind that and is responsible for the funding of its liabilities.
“In terms of corporate activity, whether that scheme still exists, there shouldn’t be an adverse impact there.
“But, where a scheme no longer exists, then it’s difficult at this stage to see where an individual might go to see whether or not there is any possibility of receiving any kind of top-up payment.
“Where a scheme has wound up, it will have done so on the assumption that it had settled all its liabilities at the time it wound up.
“The trust will no longer exist, the trustees will have been discharged of their obligations, so yes, it’s difficult to see in that sort of situation where a member might go.”
As the GMP equalisation process for DB transfers is at very early stages, it’s hard to see whether a former scheme member of a wound-up firm may be able to bring a claim to the lifeboat scheme or even to the UK regulator.
A long process
One thing to keep in mind, Briggs said, is that GMP equalisation for pension transfers will take time, possibly years, to work through and complete.
“There is an awful lot for trustees and pension schemes to do, certainly in the initial processes of trying to understand the scale of what they have to deal with and trying to get all the information together to be able to progress it.
“So, individuals should manage their expectations and understand that it will take a while to work through the process.
“But trustees know what they have to do now that the judgment’s come through and we’ll be taking that on board and working with their advisers to work through it.”
She added that it might be worthwhile for advisers and intermediaries to mention the high court ruling to their clients to “raise awareness”, so that customers could make enquiries with their pension schemes not only to check if they are due a top-up payment, but also to help trustees with the data gathering process.
