Trustees of UK pension schemes which include old guaranteed minimum pensions have got a bit of a dilemma on their hands at the moment. They have to equalise benefits between men and women to paper over the inherent inequality in the GMPs themselves, which means correcting past underpayments. There are many questions raised by that, but the one I’m interested in now is how far back. For many schemes it may be more of a judgment call than you think. So what’s the issue?
If you realise that you owe someone money that you should have paid them back in the day, but at the time neither of you thought you owed it, should you now pay them the whole lot, or not?
The starting point is statutory limitation periods, introduced to satisfy the need for certainty in legal relationships. But limitation periods are purely a defence to a claim. They don’t eradicate the underlying liability. It’s up to the debtor whether to invoke the right not to have to pay if someone doesn’t turn up in time. In the commercial world there are clear limitation periods and invoking them may be a simple decision unless there is a particular reason not to refuse the claim. In pensions it’s not quite as straightforward.
Pension scheme trustees have a duty to pay the benefits due under the scheme. The trust deed may expressly say that the purpose of the scheme is to pay those benefits. As a result I have witnessed trustees explaining to the sponsor employer that they wouldn’t invoke limitation periods if they did have to make back payments where it wasn’t the member’s fault. In their view it was an option they had, but they weren’t going to take it because their duty was to pay the correct benefits.
Then the judge in the Lloyds Banking Group case decided that there weren’t any applicable limitation periods for GMP inequalities. A combination of EU case law and old UK legislation meant trustees owed the lot. However, Morgan J then used the forfeiture provisions in the various LBG schemes’ rules to apply some different limits.
Forfeiture in the pensions world is a fairly archaic legal concept. It had a few purposes but the main one was to give trustees certainty if a member didn’t turn up to collect his pension. Instalments left unclaimed for more than six years were, or could be, forfeited to remove the need to retain assets to meet the liability. Forfeiture is not an automatic feature. The legislation allows scheme rules to include forfeiture but only in limited circumstances. It depends on the individual scheme and its history whether there is any forfeiture clause at all in the governing documents and how it is expressed.
Morgan J interpreted all the LBG forfeiture clauses to apply to that part of the member’s pension that had been underpaid. I’m not going to debate the legal rights and wrongs of that approach here, but it feels a bit rough on members. Presumably when they claimed their pension at retirement age, they thought they were claiming everything they were entitled to, and trusted the trustee to deliver correct individual instalments?
The judge’s position was that the member had not claimed the missing part of each instalment of pension, so, depending on the precise terms of the forfeiture clause, the trustees either had to treat the underpayment on each instalment as forfeit after six years, or had some discretion in the matter. Depending on the drafting, their power might be positive – only to forfeit the past underpayments on instalments if they decided to – or negative – to counteract an otherwise automatic forfeiture under the rules.
The assumption of the speakers in a recent debate on the topic seemed to be that trustees would/should always seek to counteract any forfeiture provision where possible. But why? Forfeiture clauses provide certainty. They act to keep the liabilities of the scheme current and capable of being valued and funded. There is nothing inherently prejudicial to the purposes of the scheme, or to the duties of the trustees, in the concept of forfeiture.
So is the answer that GMP equalisation is special? Should trustees be making an exception for GMP equalisation back payments because realistically all the fault lay with the pension industry and not with the members? GMPs are fiendishly complicated. You can’t realistically expect a non-expert member to work out that he has been disadvantaged in a way that he can do something about because of a different accrual rate and benefit date for GMPs prescribed by law. Only two members have tried it seriously before the Lloyds Banking Group case, and one was an actuary by trade (Mr Williamson in Marsh Mercer Pension Scheme v Pensions Ombudsman) and the other one clearly had a lot of help if he wasn’t actually in the pensions industry (Dr Kenworthy complaining to the Pensions Ombudsman).
I’m sympathetic to the idea that GMP equalisation should be an exception to the general run of forfeiture processes, not least because expecting members to make a formal claim even now after the Lloyds Banking Group case doesn’t feel right. However scheme sponsors may still have something to say about a deliberate decision consciously to increase the liabilities of a scheme beyond what is actually required by the law at this point in time.
That means trustees are going to have to look hard at their scheme rules and duties to members, and talk to sponsoring employers before deciding to treat groups of members differently for the application of their forfeiture provisions. You also need to be careful not to throw the baby out with the bathwater if trying to change the drafting – forfeiture clauses are still useful and blanket changes with retroactive effect may have unintended consequences.
Just one more challenge to add to the GMP equalisation pile!