However, some questions were left unanswered by that ruling – for example, how to deal with historic transfers-out (where the transfer payment was less than it ought to have been if the trustees had taken into account the obligation to equalise benefits) and what this means in terms of trustee discharges in relation to those transfers. The core question in the latest hearing was whether trustees remain under an obligation to anyone, and if so to whom, and in what way, to do anything about the fact that some historic transfer payments out of their schemes were inadequate.
The context of these past transfers may vary widely – members may have transferred into different types of occupational scheme or into a personal pension scheme; they may subsequently have transferred benefits on one or more times to other schemes, so that the original receiving scheme no longer retains the transferred-in benefit. Mr Justice Morgan’s ruling provides some straightforward and consistent principles – although the implementation of these may be more complex than first appears.
The position for past statutory transfers
When a transferring member applied to take the cash equivalent of their benefits as a statutory transfer, and the calculation of the cash equivalent did not include any figure to reflect the missing equalisation of benefits, then the figure used for the purposes of the statutory provisions was, in some cases, lower than it ought to have been. In the court’s analysis, the trustee’s statutory duty was not properly performed by transferring a sum that was less than the cash equivalent of the benefits to which the member was entitled. In principle, a court could order the trustee belatedly to perform its duty to the transferring member by making a top-up payment to the receiving scheme. Trustees could also perform this duty without a court order.
Where a transfer is made under the rules of the scheme rather than under the legislation (for example, a partial transfer which would be non-statutory), the position may be different. The member no longer has rights under the transferring scheme, but may be able to ask a court to set aside the earlier exercise of the power if the trustee committed a breach of duty by reference to the scheme rules when exercising the power – for example, by giving inadequate consideration to the calculation of the transfer payment.
Are trustees protected by discharge provisions in relation to past transfers?
The court went on to consider whether something in legislation (such as the discharge that applies where a statutory transfer takes place), or scheme rules, or an agreement between a member and the trustee (such as an individual member discharge), released the trustee in this case from the obligation to top-up benefits.
The court held that where a trustee does not pay the cash equivalent to which the member is entitled (but only a lower amount), the trustee is not discharged under the legislation from its obligation to pay a correctly calculated cash equivalent to the receiving scheme.
It also considered the rules of five Lloyds schemes to determine whether these might relieve the trustee of liability in relation to non-statutory transfers. In this context, the court ruled that to the extent that a transfer decision remained valid and effective under the scheme rules (rather than being set aside by a court as mentioned above), the discharge would be effective for a rules-based transfer.
Finally, the court reviewed the wording of certain standard form individual member discharges (given, for example, where a non-statutory transfer had taken place) and found that these were not effective to deal with the liability of the trustee to make a top-up payment.
Implementing the top-up
The court went on to consider whether trustees should implement the top-up by making a payment to the receiving scheme, or potentially by providing a residual benefit to the member under the transferring scheme. It held that trustees would not be able to require a member to accept a residual benefit (nor could a member require a trustee to provide a residual benefit rather than a top-up payment). Where an individual is still a member of the receiving scheme to which he or she made the original transfer, and the receiving scheme is willing to accept the top-up payment, the parties could agree to direct the payment to that scheme.
The court did not comment further on cases where the member has ceased to be a member of the receiving scheme or where the receiving scheme will not accept a top-up payment – nor did it comment on the situation where both the receiving scheme and the member have conflicting claims for payment of a top-up. Mr Justice Morgan ruled that there was no obligation in principle to make payment to the member’s current or most recent arrangement; but also suggested that the courts would be reluctant to hold that a trustee was relieved of the obligation to make any payment in these circumstances. It might be possible to agree a solution with the member, and it might be possible to pay the amount in lump sum form instead (for example as a trivial commutation payment or relevant accretion) – but the court made no ruling on this point.
What about interest, or investment return on the top-up amount?
The court ruled that the top-up payment should bear interest at 1% above base rate. Bearing in mind that in most cases the top-up payment will be relatively small, Mr Justice Morgan viewed it as impractical to devise a system where investment loss had to be taken into account.
Should trustees be proactive or reactive?
Are trustees under an obligation to take proactive steps to identify and calculate any shortfalls in previous transfers-out and to equalise them, or can they wait until a request is made by the receiving scheme or by the transferred-out member? The court’s answer to this was that trustees in this position had committed a breach of fiduciary duty at a point in the past, and that at least in relation to statutory transfers, they should be proactive in considering the position and the remedies available to members, and then determining what steps to take.
What about limitation periods and scheme forfeiture provisions?
Having reviewed the forfeiture rules in the five relevant schemes, the court found that these did not operate so as to forfeit members’ rights to require trustees to make a top-up payment. In relation to statutory limitation periods, the claim would be for an order that the trustee should perform its duty, for which there is no statutory time-bar. In other words, there was no defence under the rules of the relevant schemes or under the Limitation Act 1980 to a claim by a transferring member for an order that the trustee belatedly perform its duty.
Although this ruling is long and complex, a number of questions were deliberately set aside, and the potential variance in specific claims and scheme rules is so great that this seems unlikely to be the final judicial word on all issues relating to GMP equalisation.
One key issue that was excluded from this case relates to bulk transfers. The only ruling made in this area was that where the requirements of the preservation regulations were complied with and the bulk transfer was in accordance with the rules of the transferring scheme, then transferring members are entitled to benefits under the receiving scheme and are no longer entitled to benefits under the transferring scheme. This means that a receiving scheme, fixed with a duty to equalise benefits in relation to members who transferred to it as part of a bulk transfer, may seek to claim a top-up payment directly from the transferring scheme, depending on the terms of the bulk transfer agreement.
There also remains a possibility that in specific cases, the wording of a scheme rule or contractual obligation, or of a discharge given by an individual member, might produce a different result – although on the basis of the documents reviewed for the five relevant schemes in this ruling, that was not the case here.
The ruling provides key principles and leaves trustees with an active duty to grapple with those principles, but with flexibility as to how to implement them. A number of difficult questions remain, to which pragmatic answers will need to be found.