United Kingdom

Aon sees knock-on effects of GMP Equalisation judgment

LONDON, 20 November 2020 – Aon plc (NYSE: AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions, has said that today’s High Court ruling on the equalisation for GMPs of historic transfers out of the three largest Lloyds Banking Group pension schemes, has significant knock-on consequences for the pensions industry. This judgment supplements the original ruling in October 2018 (about the broader issue of the equalisation for GMPs) with more information on transfers.

This judgment has:

  1. Acknowledged that there is a legal requirement for schemes to equalise historic transfers-out for the effects of unequal GMP between 17 May 1990 and 5 April 1997, regardless of whether they transferred-out before or after the date of the original judgment.
  2. Unlike the first judgment, no time bar applies – meaning that schemes are unable to rely on provisions within the rules that may ordinarily limit claims to a six-year period.
  3. Made clear that interest on top-up payments is payable at the rate of Bank of England base rates plus 1%.
  4. Noted that some exceptions may apply, in particular, bulk transfers with mirror image benefits and schemes where members transfer, using provisions of the rules rather than the statutory legislation.

Aon has analysed the overall financial impact of GMP Equalisation across more than 400 schemes. This analysis suggests that on average, uplifts of around 0.5% of liabilities are typical but there is significant variation from member to member. Schemes could now see a similar uplift for members who transferred out and the size of the impact on the scheme will depend on the amount of transfer activity they have seen in the last 30 years.

Tom Yorath, partner at Aon, who acted as an expert witness in the case said:
"Our analysis suggests that this judgment will mean little to no change for the majority of people who transferred out. In a typical scheme, around 75% of members are not due a top-up.

“For the remaining 25%, although any additional pension is typically small, a transfer value would capitalise this into a lump sum. Therefore, 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"

Tom Yorath continued:
"Even schemes with excellent record-keeping have grappled with the challenges of conflicting or missing data on GMPs for their current members. Once you need to consider data for members who transferred to another scheme - potentially decades ago - the data challenge becomes orders of magnitude harder. Even where schemes have a record of where a member transferred to, you are unlikely to have the granular detail of the original benefits or the transfer calculation needed to perform a credible correction.

“The limited data on historic transfers means that even trying to make a ball-park estimate of the liability impact is likely to be a challenge for most schemes. This is particularly a challenge for scheme sponsors, many of which will recall the way that GMP equalisation costs hit company profits back in 2018. It is not yet clear whether auditors will again require equalisation of transfers to be accounted for through the P&L. But if this is so, it could be a further dent in profits in what is already an extremely challenging year for many businesses."

Lynda Whitney, partner at Aon, said:
"Similar to the first judgment, trustees will be frustrated that they are being asked to perform a technical correction that stems from the Government’s own requirements on GMP. Trustees may reasonably know little or nothing about the members concerned and may have no way to contact them, as they believed they had discharged their liability towards them.

“Even if a top-up can be calculated - which may need to be based on calculations and conditions from up to three decades ago - there is no guarantee that the receiving scheme is still in existence, or that the member has not transferred again.

“The size of the task of equalising three decades of transfers is enormous, and many schemes will be looking for pragmatic ways to limit the scope of the exercise. Helpfully, the ruling provides some limited carve outs for bulk transfers that are done on a mirror image basis and also for some transfers that have taken place under scheme rules - this may provide a glimmer of hope for transfer clubs."


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