GMP equalisation (Part 3) - Latest judgment in Lloyds Bank case clarifies approach to equalisation when converting GMPs and may help with transfers

A further judgment has been handed down today by the High Court in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank Plc and others. The latest instalment in this case, which concerns the need to equalise pensions for the effect of guaranteed minimum pensions (GMPs), follows a short hearing on 3 December 2018 and clarifies the interpretation of certain aspects of the judgment relating to GMP conversion.

The correct approach to GMP equalisation and conversion

The issue which today's judgment addresses is, essentially, what the correct approach to equalisation is in the context of a scheme that is also implementing GMP conversion. Morgan J has clarified that where a scheme is utilising the GMP conversion legislation to convert GMPs into ordinary scheme benefits, the trustees can undertake equalisation (in respect of future payments) in a single step; they are not required to first determine the level of each member's equalised pension benefit using method C2 (as referred to in the previous judgment) before calculating the actuarial value of the benefits to be converted.

In short, the trustees equalise by determining the higher of the actuarial equivalent of the unequalised female and unequalised male pensions and then take the higher of these figures as the "equalised" amount to be converted. Morgan J also confirmed that it is for the actuary rather than the Courts to determine how the actuarial equivalent of the unequalised pensions is calculated using such assumptions, as to interest or discount rates and other matters, as the actuary considers appropriate.

Implications for GMP conversion

A major concern for trustees following the first judgment in this case has been the potential costs and administrative complexities associated with equalising pensions for the effect of GMPs on an annual basis, which is a feature of the equalisation method (C2) approved by the Court. To avoid this it is likely that many schemes will seek to make use of the GMP conversion legislation.

This judgment provides helpful clarification regarding how GMP equalisation may be implemented in that context. The judge has outlined a relatively straightforward approach to equalisation that can be adopted in these circumstances and he has left it for scheme actuaries to decide the assumptions that should be used to determine the actuarial value of a member's pension benefits.

Good news for transfers

Since the first judgment, trustees have faced significant uncertainty over how to deal with transfer payments (and other lump sums) that need to be paid before they have decided how to implement equalisation across their scheme as a whole. In particular, trustees have had to decide whether to pay transfers on an unequalised basis with the prospect of a top-up to follow at a later date or whether to attempt to equalise the transfer value before it is paid. However, it has been unclear how trustees should calculate an equalised transfer value, with scheme actuaries suggesting a range of different approaches.

Although this judgment does not deal directly with transfers, it clarifies how equalisation can be effected in conjunction with GMP conversion.  On conversion, as with transfers, a one-off calculation needs to be made and assumptions have to be made about the future. By analogy, in our view, this should permit a similar approach to be taken to calculate a member's equalised transfer value.

Therefore, this may offer a solution that would enable trustees to pay equalised transfer values, benefit from a full statutory discharge and avoid the need to make a future top-up payment.

Trustees should contact their scheme actuary to seek their views on the feasibility of following such an approach.

Possible appeal

The representative beneficiaries sought permission to appeal two aspects of the first judgment at Tuesday's hearing (those were the methodology to be used for equalisation and the forfeiture period for back payments). The judge refused permission to appeal. However, leave to appeal could still be sought from the Court of Appeal, with the appeal window open until 24 December 2018.