PASA guidance on past transfers-out, following the 2020 Lloyds judgment
This is good guidance, allowing schemes to move ahead with confidence and pragmatism in order to equalise transferred-in benefits and start addressing top ups on historic transfers out.
Trustees will need to be firm in their convictions in order to avoid equalising transferred-in benefits twice – a possibility raised in the guidance.
Reviewing historic transfers out will be a significant project but armed with the guidance, free thinking advisers and a good helping of common sense, trustees will be able to see it through to completion.
The third Lloyds judgement was published on 20 November 2020 confirming that past transfers need to be revisited for Guaranteed Minimum Pension (GMP) equalisation. The judgment concluded that the trustee duty to arrange appropriate top-up payments is not time barred and, therefore, all transfer values paid since 17 May 1990 are potentially in scope. Transferred in benefits also need to be equalised. PASA (Pension Administration Standards Association) published guidance on 11 August 2021 to help trustees put into practice the implications of the judgement.
What is PASA’s guidance?
PASA’s guidance is in three parts.
- Part A discusses the role of the transferring schemes in terms of individual transfers
- Part B discusses the role of the receiving schemes in terms of individual transfers
- Part C considers bulk transfers
Non-statutory and statutory transfer values get the same treatment
The November 2020 judgement was clear that statutory transfer values would require a top-up payment in respect of GMP equalisation, but was less prescriptive on non-statutory transfer values. The guidance notes that, practically, it may not be possible to differentiate and therefore assumes that trustees will treat statutory and non-statutory transfer values the same. This seems the lower risk approach for trustees and a fairer approach for the ex-members — and is an approach that we fully support.
Top-up payments and interest
Top-up payments will require interest to be added, with the guidance suggesting that the rate of 1% pa (simple or compound) over bank base rate be adopted unless scheme rules prescribe otherwise.
Partial transfers and residual GMP-only members
Where the non-GMP has been transferred out but the GMP remains, trustees will need to consider whether a top-up payment is due or whether to equalise the residual GMP. The guidance says that the residual GMP does not need to be amended if a top-up payment is made or if a top-up payment is not needed.
Forfeiture is unlikely
The guidance says there is no statutory limitation period for transfers and confirms that for most schemes, any forfeiture rules are unlikely to apply. Again, this seems like a fair approach for ex-members but leaves trustees with the headache of potentially having to revisit all transfers out since 1990.
How proactive should trustees be?
Trustees do need to be proactive but the guidance gives reassurance that pragmatism is defensible and trustees can take account of the cost of overcoming the data gathering challenges when deciding the extent to which they go to pay top-ups.
Data gathering challenges
The guidance sets out some of the challenges faced by schemes in terms of the practicalities of data gathering, calculating necessary top up payments and arranging or receiving payments. The key steps and potential challenges are set out below in this diagram from the PASA guidance.
Pragmatism will be key in addressing the challenges set out above, and, with support from the sponsoring employer, trustees may wish to weigh up the costs of a more comprehensive approach against the implications of retaining the liability within the scheme.
Making payments direct to the ex-member
It will not always be possible to pay the top-up to the original receiving plan and the guidance considers the possibility of schemes and sponsoring employers making payments directly to the member. The most promising option being “small lump sum payments,” although trustees will need to tread carefully to avoid falling foul of adverse tax consequences.
No obligation for DC pension schemes to equalise
Thankfully the guidance gives a strong steer that defined contribution (DC) receiving pension schemes are not responsible for correcting past inequalities in transfer payments received. It remains to be seen how the operators of DC schemes will respond if approached with a top-up payment. Will it be refused if below a certain de-minimis, or accepted and passed onto the member in the form of a higher pot, less administration fees?
DB schemes – should they equalise twice?
The guidance proposes that transferred-in benefits be equalised in the same way and at the same time as main scheme benefits; this is all sensible so far.
However the guidance raises the possibility that schemes should equalise a second time on receipt of top-up payments, or decline top-up payments to avoid the potential for such an obligation.
This seems like legal madness! Shouldn’t the receipt of the top-up be used to offset the cost of the equalisation already applied, rather than giving members a windfall and potentially costing the scheme more than the amount received to calculate the adjusted benefits? Whilst declining the top-up would save the administrative hassle for the receiving scheme, it would increase the administrative costs of the transferring scheme who would then need to find another solution to discharge their liability.
This potential double equalisation seems like a gluttonous administrative and legal nonsense and trustees will do well to stand firm in their convictions to avoid equalising twice. Nevertheless, trustees may wish to check legal consensus before accepting top-up payments.
The guidance takes a common sense approach if a ‘normal’ bulk transfer agreement is in place, giving a clear steer that it is the receiving scheme that has the obligation to equalise and the transferring scheme is not obliged to pay top-ups in respect of equalising the GMP. Although, receiving schemes may wish to review legal agreements and indemnities to check whether they have any recourse to the transferring scheme.
- Schemes should ensure that GMP equalisation is being allowed for in current transfer values. This will limit the number of former members to consider.
- Press ahead with the equalisation of main scheme benefits including transfers in, making sure to finish GMP reconciliation and rectification first.
- Trustees should put in place a plan to equalise historic transfers out. Whilst they should indeed be proactive in addressing past transfers, this doesn’t mean it needs to take precedence over the equalisation of GMP of current members.
So do we really have to revisit all historic transfer values since 1990 for GMP equalisation?
In the absence of any forfeiture or limitation the answer is “yes, you have to try to”, but going to the ends of the earth is unlikely to be necessary and trustees will need to make a judgement call in light of the practicalities for their particular scheme.
If you would like to talk about this topic, we can help. Please get in touch with your usual Barnett Waddingham contact. Alternatively, you can contact me below.
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