Equalising for the effect of GMPs – when is a limit not a limit?
If you’re in pensions and haven’t heard of Lloyds yet, well you’ve got some catching up to do.
In a nutshell, pension schemes are required to equalise benefits for the effect of GMPs accrued between 17 May 1990 and 5 April 1997.
Simple. Off you go. Ok so maybe not. Plenty of wrinkles need ironing out and it isn’t a flick of a switch exercise. What’s more, further word from the courts is expected this year.
And as with many legal cases, the judgment raises as many questions as it provides answers.
One such question – and a contentious one at that – is whether trustees can apply a cut-off date to arrears owing to pensioners whose benefits need to be topped up?
Where do we start?
Trustees are under a duty to pay members their full benefit entitlement under scheme rules and applicable legislation.
In this context, that means backdating top-ups to 17 May 1990. So far so straightforward.
However, legislation sometimes sets out a cut-off point for claims – commonly six years. Miss it, miss out.
While Lloyds confirmed that there’s no applicable statutory limitation period in the context of GMP equalisation, intriguingly it was also said that trustees could potentially apply any limitation provisions in their rules.
If that is the case, any discretion should be exercised as per the usual principles. In other words; “have regard to all relevant considerations and no irrelevant considerations and then make a decision which is rational and not perverse.”
Sounds like we could save a bit here – what do our rules say?
Well naturally we can’t tell you without looking at them.
Every set of rules is different, but chances are there’s a limitation clause somewhere, whether it kicks in automatically or needs a conscious trustee choice.
First and foremost, check your rules.
Hooray we’ve got a limitation clause – what next?
Again, it depends on the exact phrasing, but the likelihood is that there will be a reference to members failing to “claim” benefits (other wording is available).
Assuming that’s the case, trustees need to decide whether pensioners have failed to make a claim.
Truth be told, we expect many trustees will find this difficult. Why?
- Depending on what was said to them at retirement, pensioners may reasonably have thought they were claiming their full benefits at retirement.
- Given the legal position was only relatively recently clarified, for the majority there was no certainty that there was even a “claim” for further benefits to be made when they retired.
- Even if a savvy member had claimed their “missing benefits”, trustees wouldn’t have been able to pay them as how they should be calculated was unknown.
Oh and its probably also worth noting here that limitation is arguably the most contentious area of the Lloyds judgment, and many commentators consider it inappropriate to impose a limit on backdating payments in this context.
We are comfortable there was a missed “claim” – is there anything else we should think about?
Put bluntly, yes.
All future and prospective payments to pensioners and active / deferred members will need to be fully backdated to 17 May 1990.
Therefore, by applying a limitation to pensioners only, trustees risk being accused of treating certain members unfairly. That’s not nice a comfortable position to be in. And more importantly it might lead to future claims.
There’s also a question as to where the cut-off point starts. GMP equalisation is unlikely to be a quick fix, so trustees would be safer going back six years from Lloyds. This would ensure pensioners are not disadvantaged by delays in implementing.
What are others doing?
It’s still early days so we haven’t seen how this will play out in practice.
However, initial indicators from our clients suggest most trustees are envisaging fully backdating to equalise for the effect of GMP equalisation.
Naturally, some employers might wish to use limitation rules to minimise costs, but that’s a risky approach in our view. Members may well put up a fight.
How much will it save us?
How long is a piece of string? But consider it and seek actuarial input.
The saving will depend on the age and benefit profile of the members, but if its potentially relatively small, is applying a limitation worth it? We’d expect there to be administrative costs involved, and then you’ve got the potential for member challenges.
All crystal clear? Food for thought at least. Please do get in touch with any questions.