GMP equalisation - Beware the forfeit!

One of the more surprising elements of the decision in the recent Lloyds Bank case is that the judge, Justice Morgan, held that the payment of arrears that become due when a scheme implements GMP equalisation are not subject to a statutory limitation period on the basis that the claim is a claim for recovery of trust property (and not a claim for breach of trust) for which there is no limitation period under the Limitation Act 1980.

This aspect of the judgment has been heavily criticised and could well be challenged at some point in the future. However, given that there is not going to be an appeal in Lloyds, this is the law as it currently stands. As a result, all eyes are now turning to scheme rules to determine the extent to which (if at all) back payments that need to be paid to correct past underpayments of pensions may be time limited.

Where there is no restriction on back payments under a scheme's rules, arrears of pension may need to be paid as far back as 17 May 1990 for some pensioner members, this being the date on which the European Court of Justice ruled in Barber that male and female members where entitled to equalised pension benefits.

The review of scheme rules needs to be carried out on a scheme by scheme basis to determine, firstly, whether a scheme has a so-called "forfeiture rule" and, if so, how that rule operates.

One thing that quickly becomes apparent when you compare scheme rules is that no two forfeiture rules are the same. However, there are some key points that will need to be considered in every case.

When does time start running?

Typically, where a scheme has a forfeiture rule, it provides that a member loses their entitlement to be paid a benefit if they fail to make a claim within, say, six years of the benefits becoming payable or the member becoming entitled to the benefit.

Therefore, the first thing to determine is when the benefits in question "became payable" or when the member became "entitled" to them. This will need to be considered in the context of the particular rules in question.

Where, as is the case here, we are dealing with instalments of pension that have been underpaid, the application of the forfeiture rule to instalments will need to be considered. Following the judgment in Lloyds, it is likely that each underpayment will be treated as having become due at the same time as the instalment of pension to which it relates.

When does time stop running?

In order to stop time running under a forfeiture rule a beneficiary has to "claim" their benefits.

In his judgment in Lloyds, Morgan J does not consider in detail what constitutes a “claim” for these purposes. However, he makes clear that where there has been an underpayment of a pension, a beneficiary needs to make a claim for the underpayment. Claiming the pension (or the instalment to which the underpayment relates) is not enough. It is highly unlikely that members would have made such a claim. The clock is therefore running against members in relation to any back payments that may be payable.

In Lloyds, the Banks accepted that the reference to a “claim” in the Rules of the relevant schemes and in section 92(5) of the Pensions Act 1995 (with which forfeiture rules must comply) was not restricted to the issuing of legal proceedings claiming payment of the arrears. However, the judge did not express a view on this.

Therefore, we are left with some uncertainty regarding what action a member must take in order to claim historic underpayments.

Should trustees take steps to stop the clock running?

Given that, following the decision in Lloyds, affected members are required to make a specific claim for historic underpayments and, in many cases, it is likely to be some time before members' benefits are equalised, trustees ought to consider what steps they should be taking to protect members' interests.

Relying on members to take action themselves to claim historic underpayments is unrealistic. As a result, trustees of some schemes are taking matters into their own hands and amending their scheme's rules to enable them to disapply their scheme's forfeiture rule or to limit its application so as, for example, to enable back payments to be made to members going back up to six years prior to the date of the Lloyds judgment. This may require the sponsoring employer's consent and, in any event, trustees should seek to secure their sponsor's agreement to this.

What should trustees do where they have discretion over whether or not to enforce a forfeiture rule?

Morgan J said very little about how trustees should exercise their discretion in these circumstances. He did however state that “the general rules as to the exercise of trustee’s discretion applies”, meaning “a trustee should have regard to all relevant factors and no irrelevant factors and must make a decision which is rational and not perverse”.

This indicates that trustees are entitled to exercise their discretion under a forfeiture rule to limit back payments, provided they have gone through the right thought process before doing so. This should include considering the impact of not applying the forfeiture rule on the scheme's funding position and the sponsoring employer.

Reaching consensus

The operation of a scheme's forfeiture rule and how it impacts the implementation of GMP equalisation and, in particular, the costs associated with this will vary from scheme to scheme.

Points of uncertainty will undoubtedly arise when the operation of a scheme's forfeiture rule and its application in this context is considered closely. Therefore, as with all aspects of implementing GMP equalisation, trustees should seek to reach a consensus with their scheme's sponsor over how their scheme's forfeiture rule will be applied. This includes considering what actions should be taken to mitigate the impact of delays in implementing GMP equalisation on scheme members.

The tax implications of limiting back payments or exercising powers to increase the amount that members stand to recover should also be considered, particularly in relation to members who have little or no lifetime allowance available and those with tax protections.