This judgment supplements the original ruling in October 2018 (about the broader issue of the equalisation for GMPs) with more information on transfers.
This judgment has:
1. Acknowledged that there is a legal requirement for schemes to equalise historic transfers-out for the effects of unequal GMP between 17 May 1990 and 5 April 1997, regardless of whether they transferred-out before or after the date of the original judgment.
2. Unlike the first judgment, no time bar applies – meaning that schemes are unable to rely on provisions within the rules that may ordinarily limit claims to a six-year period.
3. Made clear that interest on top-up payments is payable at the rate of Bank of England base rates plus 1%.
4. Noted that some exceptions may apply, in particular, bulk transfers with mirror image benefits and schemes where members transfer, using provisions of the rules rather than the statutory legislation.
Aon has analysed the overall financial impact of GMP Equalisation across more than 400 schemes. This analysis suggests that on average, uplifts of around 0.5% of liabilities are typical but there is significant variation from member to member. Schemes could now see a similar uplift for members who transferred out and the size of the impact on the scheme will depend on the amount of transfer activity they have seen in the last 30 years.
Tom Yorath, partner at Aon, who acted as an expert witness in the case said: "Our analysis suggests that this judgment will mean little to no change for the majority of people who transferred out. In a typical scheme, around 75% of members are not due a top-up.
“For the remaining 25%, although any additional pension is typically small, a transfer value would capitalise this into a lump sum.
Therefore, the top-up can range from a few pounds, to some extreme cases where the top-up could be tens of thousands of pounds.
“The challenge facing the industry is identifying those who have been affected, as in many cases schemes simply will not hold the data to know whether the member had GMPs accrued from 1990 to 1997 – let alone how much the top-up is"
Tom Yorath continued: "Even schemes with excellent record-keeping have grappled with the challenges of conflicting or missing data on GMPs for their current members. Once you need to consider data for members who transferred to another scheme - potentially decades ago - the data challenge becomes orders of magnitude harder. Even where schemes have a record of where a member transferred to, you are unlikely to have the granular detail of the original benefits or the transfer calculation needed to perform a credible correction.
“The limited data on historic transfers means that even trying to make a ball-park estimate of the liability impact is likely to be a challenge for most schemes. This is particularly a challenge for scheme sponsors, many of which will recall the way that GMP equalisation costs hit company profits back in 2018. It is not yet clear whether auditors will again require equalisation of transfers to be accounted for through the P&L. But if this is so, it could be a further dent in profits in what is already an extremely challenging year for many businesses."
Lynda Whitney, partner at Aon, said: "Similar to the first judgment, trustees will be frustrated that they are being asked to perform a technical correction that stems from the Government’s own requirements on GMP. Trustees may reasonably know little or nothing about the members concerned and may have no way to contact them, as they believed they had discharged their liability towards them.
“Even if a top-up can be calculated - which may need to be based on calculations and conditions from up to three decades ago - there is no guarantee that the receiving scheme is still in existence, or that the member has not transferred again.
“The size of the task of equalising three decades of transfers is enormous, and many schemes will be looking for pragmatic ways to limit the scope of the exercise. Helpfully, the ruling provides some limited carve outs for bulk transfers that are done on a mirror image basis and also for some transfers that have taken place under scheme rules - this may provide a glimmer of hope for transfer clubs."
Alasdair Mayes, Partner at Lane Clark & Peacock LLP said: “Today’s judgment isn’t a surprise, but it will add to the burden for pension scheme trustees who already have plenty to keep them busy. Based on the equalisations we have already completed, top-ups will in many cases be small or nil, but for a few individuals will be thousands of pounds. In my experience the largest uplifts tend to be for men that worked / retired after age 60 but it’s very specific to each case.
He went on to say: “The immediate action is for sponsors of pension schemes to assess whether the impact is material for their upcoming year-end accounts.
“Any top up will not be cash in hand to the member, but to their pension savings in the scheme they transferred to.
“Anyone who has transferred a DB pension earned after 1990 could be affected. Members do not need to take action at this stage.
We would expect their pension scheme to check its records to see if an adjustment needs to be made, and this complex process will take months if not years.”
Matt Davis Head of GMP Equalisation at Hymans Robertson said: “This ruling addresses the thorny issue of pension schemes picking up the tab for GMP equalisation for past transfer values. This should be good news for some of those who took a transfer value as they may now be in line for a top up payment. However, the effort involved in revisiting transfers paid out by pension schemes across the industry over the last 30 years will be a very significant challenge for schemes, and in many cases historical data will not be available.
“For sponsors of pension schemes who report accounting figures under IAS19 the ruling is likely to trigger a need to assess extra accounting liabilities and the impact on P&L. For those due to report as at 31 December 2020 the timing of the ruling doesn’t leave much time to analyse this.”
Adrian Kennett, a professional trustee at Dalriada Trustees, said: "Trustees who thought they were protected by discharge forms signed by members who transferred out now learn that they largely are not. They will now need to go hunting for data to recalculate transfers out of schemes as far back as 1990. It is yet another painful day in the subject of GMP equalisation - administration systems and processes are going to be really put to the test."
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