Lloyds final judgment creates a headache for pension trustees

The key headlines are as follows:

Cash equivalent transfers

The court found that members who had exercised their statutory right to take a cash equivalent transfer value were entitled to a transfer value of their accrued benefits, including their equalised benefits.  Unequalised transfer values paid by the trustee did not fulfil that duty and did not therefore benefit from the statutory discharge.  Nor did the wording of the discharge forms signed by the members release the trustee from providing the top up.

Members who had applied for a statutory transfer payment, which was made on an  unequalised basis, are able to apply to the court for an order that the trustee must top up their transfer values.  The court could be asked, however, to make another order appropriate to the circumstances, or to award compensation instead.

The member claims in this case were not time barred, either under the scheme rules (rules relating to unclaimed benefits) or under legislation (limitation).  The unclaimed benefit rules in issue related to instalments of pension or sums payable to the member rather than to a receiving scheme.  Also, the right to receive a top up payment to a receiving scheme could not be described as a benefit under the schemes.  No statutory limitation rules were found to apply to claims by members for equitable relief or to recover trust property in the possession of the trustee (such as a top up from the scheme).

The court stated that the trustee should be proactive in considering the rights and obligations explained in the judgment and determine what to do as a result.  In particular, the trustee is able to top up transfer values without a court order.  The trustee may not choose instead to provide residual benefits under the transferring scheme as their duty is to make the correct transfer payment, but trustees and members are able to agree alternatives to a top up.  This could be particularly useful if the original transfer was made some time ago and the member had since made a further transfer or withdrawn the benefits.

Top ups should be awarded interest at the rate of 1% over base rate. Once a top up has been made to the receiving scheme, the trustee will benefit from the statutory discharge.

Non statutory transfers

Transfers made outside of the cash equivalent transfer legislation – for example a transfer of defined benefits within a year of normal retirement age –  were found to be governed by the scheme rules. The rules will determine how the transfer payment must be calculated.  Where the trustee had made a transfer without taking account of equalisation, it would not have considered all relevant matters and may have committed a breach of duty, but this would depend on the facts of the individual transfer.

If a breach of duty had taken place, the trustee's transfer decision is voidable by the court.  This would generally require an application by the member to set aside the transfer so that it could be made again for the correct amount.  Any discharge provided by the scheme rules is valid for so long as the decision regarding the amount of the transfer value remains a valid and effective decision (in other words, has not been set aside by the court).  It is not generally appropriate for trustees to apply to the court themselves to set aside their own decisions, but the judgment notes that, for practical purposes, there may be no other suitable person to do so.

Bulk transfers

Members whose benefits were transferred by bulk transfer under the scheme rules and in accordance with the preservation legislation no longer have benefits in the transferring scheme.  Assuming mirror-image benefits were provided in the receiving scheme and the actuarial certification requirements were met, the trustee of the transferring scheme would be discharged from the duty to provide benefits.

Next steps

The judgment is 115 pages long and considers the statutory transfer legislation and individual scheme rules in detail.  The judgment was given in the context of GMP equalisation but its principles have wider implications.  Trustees who are undertaking or have undertaken any corrections to benefits should take advice on how to treat past transfers out in the light of the judgment.