There is a roaring silence surrounding the second judgment on GMP equalisation which was delivered against the Lloyds Banking Group pension scheme but impacts all DB pension schemes that contracted out using the Government’s system of Guaranteed Minimum Pensions.
The best word for the judgment is “awkward”. It is the judgment no-one wanted but was unavoidable, the result of three decades of legislative and social change that had passed this arcane backwater of pension administration by.
This article suggests the issue can’t be ignored but that it needs to be managed with extreme care by advisers who have quite enough on their plates already – when it comes to DB transfers.
What is the problem?
The High Court has ruled that trustees of defined benefit (DB) schemes that provide GMPs should revisit transfers and top-up historic cash equivalent transfer values (CETVs) that were calculated on an unequalised basis if a member submits a successful claim.
It will impact DB schemes that provided GMP on benefits accrued between 17 May 1990 and 5 April 1997.
Analysis by Aon suggests that this judgment will mean little to no change for the majority of people who transferred out. In a typical scheme, around 75 per cent of members are not due a top-up.
For the remaining 25 per cent, although any additional pension is typically small, a transfer value would capitalise this into a lump sum. So, the top-up can range from a few pounds, to some extreme cases where the top-up could be tens of thousands of pounds.
The challenge facing the industry is identifying those who have been affected, as in many cases schemes simply will not hold the data to know whether the member had GMPs accrued from 1990 to 1997 – let alone how much the top-up is.
So what can you tell your clients?
This is hardly front page news, Martin Lewis is not offering pro-formas on his website and most people will not get any more excited knowing that they may be due a top up to their transferred pension pot than they are knowing that they may get lower pension increases after 2030 because of changes to the way RPI is calculated.
The question is whether advisers should be getting on the front foot with clients they know had GMPs between 1990 and 1997, or whether to contribute to the roaring silence.
There are clearly a number of personal factors at work here
- Is discussing a past transfer likely to release pent-up issues concerning the advisability of the transfer (whoever advised) and is this helpful?
- Will alerting a client to a potential windfall payment create an expectation that cannot be met?
- Is there anything that either the client or the adviser can do to help establish whether there is a claim?
- If there is a claim, can an adviser work out the likelihood of the counterparty being in a position to meet it?
- Does the issue merit attention now , when there are other competing matters on the agenda?
Right now, there is no clarity about any of these questions and advisers may be best placed simply making clients aware that they are “aware” of the issue. That means knowing enough to explain the basics and adopting a passive approach, perhaps an article in a newsletter , rather than an agenda item for the next meeting. Items that ought to be covered include;-
- What is a Guaranteed Minimum Pension and why it formed part of the pension paid by an employer’s pension trustees.
- Why, having signed a disclaimer to any further rights over the scheme, the client may now have rights over the scheme (the judgment is without limitation – meaning that it over-rides time and documentation).
- The chances of more money coming are small but increased if the client has details of transfers of defined benefit pension rights for service in the GMP window.
- If the client feels they have a claim, help is on hand (see below from where).
This final point is perhaps the most awkward for an adviser (and one that merits the use of “sand trap” in the title of this article.
The process of getting to a point where a claim can be calculated could be arduous. A forensic dig into the pension archives to establish who has inherited liability that might include organizations such as the Pension Protection Fund or an insurance company that has bought out the scheme’s liabilities.
Then there is the question of documents, as I point out above, in discharging the liability, the trustees may have discharged all records and rights might only be recreated with reference to scraps of payroll information and perhaps archived returns to HMRC. The cost of all this is almost certain to be greater than the value of the top-up.
Which suggests that some kind of settlement may be in order based on likely rather than exact liability (which the judgment hints at). What is almost certain is that apart from a few schemes (such as LBG’s), very few trustees will have the capacity to retrospectively revisit transfers out made up to 30 years back. This is not a great time to be embarking on such an undertaking.
Help at hand?
Time is likely to be a major player in sorting this mess out. The lawyers will make sure that the problem isn’t swept under the carpet, but the only immediate imperative on trustees is to ensure that potential liabilities arising from the judgment are recognized in scheme accounts. No precise estimate of increased liabilities can be calculated this scheme year.
That means that client expectations should be managed around resolution being some time between now and the end of the decade and that means many older clients may never see resolution. This may not sound very helpful and if a client is insistent that they are moved to the top of the restitution queue, then advisers can help (and should be paid for doing so).
Collecting the correct data for making a claim is the start, finding the right person to whom the claim addressed the second part and ensuring that the claim is considered and calculated the third.
But I would strongly caution advisers against doing any work on a contingent basis (eg charging a percentage of the top-up arising). Not only will 75% of claims result in a zero top-up but the majority of the rest will be too small to cover work done. Only if the client is really insistent, can a fee for the work be charged and it must be upfront and with the client’s knowledge that it may not result in success.
I suspect that when presented with the commercial realities of pursuing a claim via the adviser, insistent clients will pursue the claim themselves or simply let the matter take its course.
There are of course the usual points of contact to refer clients to. These include TPAS and the Pensions Ombudsman who will no doubt be preparing themselves for a round of inquiries from those who have no advisers.
I have seen it suggested that financial advisers be recruited by the occupational pension industry to be a pro-bono resource for information on likely claims and I am sure most would want to help where possible. However financial advisers need to be careful that an offer of help does not become an obligation and that they do not – needlessly – take on liabilities to undertake work which proves fruitless.
The general message ought to be that advisers should be aware, helpful but not optimistic. The numbers of clients getting GMP equalization windfalls will be tiny and the potential work identifying them – enormous. For most advisers, GMP equalization will be a sand trap into which they should enter with great caution.