Pensions; TPR pledge to combat pension scams and more.

Pensions; TPR pledge to combat pension scams and more.

 

• GMP equalisation: High court signals a route to addressing past transfers
• TPR Guidance: Protecting schemes from sponsoring employer distress
• ABI: Big jump in pension savers accessing pots after pressing pause in the first lockdown
• TPR: Make a pledge to combat pension scams

 

GMP equalisation: High court signals a route to addressing past transfers

(AF3, FA2, JO5, RO4, RO8)

More than two years from the original decision in the case of Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank Plc & Ors [2018] EWHC 2839 (Ch) (26 October 2018), the High Court has delivered an important further judgment on guaranteed minimum pensions (GMPs) and past transfers of unequalised benefits. This case; Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank PLC & Ors [2020] EWCh 3135 (Ch) (20 November 2020), provides some further clarity, combined with the promise of more administrative headaches.

The background

As set out in our Law-Now on the original judgment, the Court had held that trustees of pension schemes must equalise pension benefits for the effect of GMPs accrued between 17 May 1990 and 5 April 1997. Trustees and employers have been wrestling with the practical implications ever since.

The latest part of the proceedings concerned the treatment of members who had previously transferred benefits from the Lloyds schemes to other pension schemes, given that those transfers were not calculated on a basis which equalised for the effect of GMPs.

Were the transferring trustees discharged?

The Court has now held that where a scheme had made a cash equivalent transfer, calculated to give effect to a member’s statutory right to one (except in relation to GMP related inequalities), the scheme remains liable to make a correctly calculated top-up transfer payment to the receiving scheme. The transferring trustees could not rely on the statutory discharge in the Pension Schemes Act 1993 nor any discharge forms signed by members at the time. Although the member’s right was to a top-up transfer payment, it would be open to the trustees and member to agree an alternative remedy. Any top-up payment should bear interest at 1% above base rate.

The judge held that the existence of this obligation on the trustees of a transferring scheme did not alter the duty of the receiving scheme trustees to provide equalised benefits. These were concurrent obligations.

However, for other, non-statutory transfers (e.g. for members within a year of, or who have passed, their normal retirement date), the Court held that the member no longer had rights under the transferring scheme, unless (a point which it held open on the facts) the member could demonstrate the trustees had breached their wider duties. Where a bulk transfer had been made in line with pension preservation law requirements, the transferring trustees would also no longer have liability for the member’s benefits.

The judgment provides an overdue analysis of the landmark European Court of Justice decision in Coloroll, long-debated in relation to transfers and equalisation. The judge concluded that the transferring trustees owed the same liability to make a top-up payment under EU law as they did under domestic law.

Trustee duties to identify claims

The parties asked the Court whether transferring trustees were under a proactive duty to identify, calculate and correct shortfalls in previous transfers out, or whether they could wait until a request was made by the affected member or the receiving scheme. The judge was reluctant to be drawn on detail, simply concluding that: “the Trustee does need to be proactive in that it must consider the rights and obligations which I have identified, the remedies available to members and the absence of a time bar and then determine what to do.”

Although the judge was clear that doing nothing was not an option, this could potentially open the door to some flexibility for trustees as to how they go about this exercise.

Actions for trustees and employers

Trustees and employers should already have a strategy in place for addressing outstanding GMP issues, through a permitted equalisation methodology and possibly in combination with the statutory option of ‘converting’ GMPs to normal scheme benefits. They now also have confirmation that they need to address historic transfers involving GMP.

Beyond the issue of GMPs, the case also flags the limits on the extent to which trustees can rely on a statutory, rules-based or contractual discharge in circumstances where they have made errors in calculating statutory transfers.

However, the judgment is extremely detailed (running to over 100 pages) and in some places is tailored to the circumstances and rules of the schemes in question. Trustees and their advisers will therefore need to digest the judgment fully before progressing their plans.

TPR Guidance: Protecting schemes from sponsoring employer distress

(AF3, FA2, JO5, RO4, RO8)

On 12 November the Pensions Regulator (TPR) published guidance urging trustees to prepare now for the possibility that their sponsors might face difficulties in these challenging times.  In it TPR reminds trustees that they “are the first line of defence for savers and their pension schemes” and it is vital that they “remain alert, prepare, plan and are ready to act as the economic impact of global events develops".

Although there is nothing materially new in the guidance, it sets out clear expectations for trustees as we go into what are likely to be challenging economic circumstances in the coming months.  These expectations also look to be more prescriptive than we have heard from TPR previously in a number of areas.  For example, key points made in the guidance include recommendations that as part of best practice, integrated risk management trustees:

• Should adopt a fully documented IRM approach to their scheme with workable contingency plans and suitable triggers in place.
• Should review and challenge financial forecasts and stress test assumptions as a part of the monitoring process.

Where the sponsor is showing signs of financial distress, one of the many suggestions is that trustees should not wait for formal confirmation of a covenant downgrade at an actuarial valuation before taking mitigating action.  If they have robust contingency plans with specific triggers, they can take action as soon as a threshold is met.

And where the sponsor is facing the prospect of insolvency, one suggestion is that trustees should take professional advice from specialist restructuring advisers to make sure that all options to protect the scheme’s position have been explored, before taking specific action.

There are five annexes to the guidance – and the first two are likely to be of particular practical use, with Annex 1 setting out useful considerations around who has statutory and contractual obligations to the scheme, and Annex 2 listing signs of corporate distress that trustees could look out for.

The guidance is accompanied by a blog by Mike Birch, TPR’s Director of Supervision.

Comment

The fact that TPR has considered it necessary to issue this guidance is a stark reminder of the expectations of trouble ahead for many industry sectors.  The change in emphasis in some areas – for example around integrated risk management and a more pro-active approach to due diligence and action in the face of covenant deterioration – makes it clear that it has high expectations of trustees and their duty to protect their members’ interests.

ABI: Big jump in pension savers accessing pots after pressing pause in the first lockdown

(AF3, FA2, JO5, RO4, RO8)

Figures from the ABI, set out in a Press Release, have revealed that the number of people accessing their pension as a flexible income increased by 56% between April and September this year. The ABI's research compared data from April, when the country was in full lockdown, to data from when restrictions were eased in September. The findings show that the number of people withdrawing only a tax-free lump sum increased by 55% and the number of people withdrawing all of their pension in one lump sum increased by 94%. However, the ABI also found that withdrawals of all types still remain below 2019 levels.

TPR: Make a pledge to combat pension scams

The Pensions Regulator (TPR) launched a new campaign: “Pledge to combat pension scams”. This calls on pension providers, trustees and administrators to sign up to a pledge to help protect pension savers from the devastating impact of pension scams.

The campaign, supported by the Pension Scams Industry Group, requires those who sign up to agree to the following six steps:

• Regularly warn members of the risk of scams.
• Encourage those asking for cash drawdown to call the Pensions Advisory Service for free impartial guidance.
• Learn the warning signs of a scam and best practice for transfers.
• Take appropriate due diligence measures and document pension transfer procedures.
• Clearly communicate concerns to customers if high-risk transfers are being made.
• Report concerns about a suspected scam to the authorities and communicate this to the pension scheme member.

The pledge can be signed up to through TPR’s website, which also allows for pledgers to self-certify to TPR that they meet the pledge, which can then be communicated to scheme members and the public.  TPR’s trustee toolkit also now has a scams module providing assistance in this area.

Pensions Ombudsman Anthony Arter said in a Press Release: “Now more than ever it is vital that the industry takes positive steps to raise public awareness and protect people’s pensions.”

Charlotte Jackson, Head of Pensions Operations and Consumer Protection at the Money and Pensions Service (MaPS), commented in their Press Release that: “It's vital that we work together with pension providers, trustees and administrators to help protect savers. We encourage anyone thinking about making decisions on their pension to get guidance first.”