Trustees could be forced to top up historical final salary pension pay-outs

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The High Court has ruled that the trustees of defined benefit pension schemes will have to revisit any pension transfers made over the past 30 years, and potentially top-up members’ benefits where guaranteed minimum pay-outs were promised.

In a decision handed down on Friday (20 November), Mr Justice Morgan ruled that trustees committed a breach of duty if they did not equalise a member’s guaranteed minimum pension (GMP) benefits at the time they were calculating the scheme’s cash equivalent transfer value (CETV).

This decision will affect trustees of any defined benefit (or final salary) schemes that offered GMP, dating back to any accrued between 17 May 1990 and 5 April 1997.

People who were a member of a final salary pension scheme between 1978 and 1997 are most likely to have had a GMP. They were automatically withdrawn from the state earnings-related pension scheme (SERPS) and to ensure they did not miss out, the government guaranteed a minimum pension broadly equivalent to the one they would receive from the state.

However, because this meant that men and women would tend to receive different amounts over time, this treatment was ruled as discriminatory under EU law. And in October 2018, the High Court ruled that trustees of Lloyds Bank’s scheme must equalise pension benefits between women and men who paid into such GMP schemes after three women brought a claim for sex discrimination, complaining their pension incomes were increasing at a lower rate than those of their male colleagues.

This decision did not cover the question over whether past pension transfers should be equalised, however, which this judgment now clarifies.

Samantha Brown, regional head of employment, pensions and incentives at Herbert Smith Freehills, said this was “another landmark ruling” in the equalisation of pensions.

She said: “Once again, this ruling is likely to affect every DB scheme in the UK that provides GMPs accrued between 17 May 1990 and 5 April 1997. It means that trustees of such schemes are required to revisit cash equivalent transfer values paid to former members and make a top-up payment where a member has not been paid their full entitlement.

“Trustees of affected schemes should already be taking steps to equalise the benefits of male and female members who are still in their scheme, following the ruling in the first judgment. These GMP equalisation projects will now need to be extended to include historic cash equivalent transfer payments.”

The trustees of the Lloyds’ schemes would not be exempt from the need to top-up historic CETV payments, she added. Furthermore, the duty to correct inadequate transfers is not time-barred.

“The fact that trustees cannot rely upon any statutory, rule-based or contractual discharge and that claims are not time-barred could have much wider implications, and not just for schemes dealing with GMP equalisation, as it means that trustees may not benefit from any kind of discharge or limitation defence in other circumstances where transfers turn out to have been calculated incorrectly,” said Brown.

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