19 December 2018
It’s only seven weeks since Justice Morgan handed down his judgment in the Lloyds Bank case, but already a lot has happened.
On Monday 3 December there was a further hearing at which it is reported the three members in the case sought leave to appeal and a clarification on the judgment. A further consequential hearing is expected in the New Year. It seems those of us who hoped that the judgment in October provided clarity on what needs to be done, need to wait several months before we can assess the true impact of the judgment on individual members.
So, what do we know, what don’t we know and what action should schemes take as a result?
What we do know is that:
- The members still prefer a more generous approach (method A3) than that chosen by the judge as the default (method C2);
- They also consider that it is not appropriate to restrict arrears payments to six years on account of the wording of the scheme rules;
- The judge did not grant leave to appeal on either point, as he considered there was not a sufficient prospect of success, but the members can still appeal direct to the Court of Appeal up until Christmas Eve;
- The parties sought clarification on how the method involving GMP conversion to a simplified benefit structure (method D2) would operate. A further judgment handed down on Thursday 6 December provided some answers but several questions remain;
- The DWP launched a consultation on Friday 7 December regarding pension consolidation that confirms it is working on (non-statutory) GMP guidance for trustees and sponsors, and it hopes to be able to issue the guidance “in the near future”;
- The consultation also confirms that the DWP is working with HMRC on the pensions tax implications of removing GMP inequalities (there are some real complexities here that we all hope are resolved);
- A further court hearing in the New Year will ask a series of questions on the practical implementation of the judgment.
All this means that there remains considerable legal uncertainty on how benefits need to be adjusted. Making a short-term fix to payments such as transfer values or trivial commutations could therefore be quite risky in many situations.
From our work on real-life cases, the fine detail of the methodology applied can result in different members receiving adjustments to benefits. Actuaries and administrators can provide calculations based on an assumed methodology, but future clarifications from the Court or guidance from DWP could well leave trustees questioning whether the right adjustments have been applied to the right members – and the last thing many trustees will want to do is revisit calculations yet again.
So what can be done?
There has been no suggestion that the issue is going to go away. It is also clear that whilst many members will see no increase in the value of their benefits, many could see a change in form of their benefits (more income now and lesser increases later under both methods C2 and D2) and a few will see material increases in their retirement income. So this is an important issue.
I believe that the administrative complexity of the A, B & C methods means that being able to deliver simplification through conversion would be valuable to many. The DWP consultation on consolidation is silent on simplification. I think that is a missed opportunity and would encourage schemes to respond to the consultation asking for government support for simplification, as indeed the ACA and Royal London have recently done in a Joint Policy Paper.
What schemes can also do is start laying the ground work to resolve GMP inequalities in anticipation of being able to consider more detailed options in a few months’ time, once the consequential hearing in the Lloyds Bank case has taken place. You should then be in a position to agree a methodology and implement changes to future transfer values and full commutations in the second half of the year. Realistically adjusting benefits for existing pensioners and, if necessary, revisiting past transfers, full commutations and deaths will in many cases be a task for 2020 and possibly beyond.
Your next steps
Alongside responding to the DWP consultation seeking support for simplification, my recommended actions are for schemes:
- to ensure member communications have been updated appropriately
- to make sure that your GMP reconciliation is completed
- to establish the detail of current and past administrative practices; and
- to start checking a number of detailed legal points with your lawyers.
You will then have a firm foundation to work from as the gaps are filled in on the remaining legal detail.
Download our addressing GMP inequalities road map to help you navigate the journey around GMP.