Those who have transferred out of a defined benefit scheme over the past 30 years now urgently need to seek advice on whether they are due top-up payments, following a high court ruling last week.
This legal judgement gives members who have transferred out of DB schemes the right to have their payments reviewed in light of the equalisation of guaranteed minimum pensions (GMP) benefits accrued between 1990 and 1997.
This ruling states that top-ups should correct the original transfer calculation with interested added, rather than reflecting how the basis for calculating transfer payments has changed in the meantime.
Willis Towers Watson senior director Colin Smith says: “There have been over 250,000 transfers out of defined benefit schemes since ‘pension freedom’ took effect in 2015.
“Not all of these members will have had 1990-1997 GMPs and not everyone who did will be due a top-up, but the number of transfers in scope from this era alone could be approaching 100,000. While transfers before then were less common, the judgment does not apply a time limit, so transfers stretching all the way back to 1990 are in scope.”
“Top-ups will generally be quite a small percentage of the original payment, especially for higher earners. The average amount might be in the low thousands of pounds, but we have seen examples where the top-up could be as big as £30,000.”
However, members have to contact schemes if they want their payment recalculated, rather than schemes recalculating and paying redress automatically.
DeVere Group chief executive and founder Nigel Green says this means there is now an urgent need for these members to seek advice on this issue. Many would have had to get advice prior to a DB transfer.
Green estimates that this landmark ruling could mean that up to a million savers are potentially be entitled to have payments recalculated – although not all will get top-ups.
He says: “This will be an expensive blow and an administrative nightmare for many businesses who will now need to trawl decades of data and then shell out this money to these pension holders.
He advised those who have transferred their retirement nest eggs to demand the additional money “as soon as possible.”
Willis Towers Watson points out that this is going to create significant extra work for pension schemes and may also add to their liabilities.
Smith says: “Schemes will need to do a lot of work to estimate the cost, but we would expect this to be around £0.5bn in aggregate. Accounting disclosures suggest that the 2018 GMP ruling added around £4bn to FTSE 350 companies’ defined benefit liabilities.
“Although the financial impact of today’s judgment may be smaller, the administrative task of going back to top up past transfers for members who were thought to have left schemes many years ago, could be much more challenging.”
He adds: “Despite everything that the pandemic has thrown at pension schemes, a recent Willis Towers Watson survey found that making progress with ‘GMP equalisation’ was the issue most likely to be cited by DB schemes as their top priority for the next year. That task just got bigger.”
Hymans Robertson head of GMP equalisation, Matt Davis adds: “This ruling addresses the thorny issue of pension schemes picking up the tab for GMP equalisation for past transfer values.
“This should be good news for some of those who took a transfer value as they may now be in line for a top up payment. However, the effort involved in revisiting transfers paid out by pension schemes across the industry over the last 30 years will be a very significant challenge for schemes, and in many cases historical data will not be available.
“For sponsors of pension schemes who report accounting figures under IAS19 the ruling is likely to trigger a need to assess extra accounting liabilities and the impact on P&L. For those due to report as at 31 December 2020 the timing of the ruling doesn’t leave much time to analyse this.”
This ruling also present significant challenges for trustees. Adrian Kennett, a professional trustee at Dalriada Trustees, adds: “Trustees who thought they were protected by discharge forms signed by members who transferred out now learn that they largely are not.
“They will now need to go hunting for data to recalculate transfers out of schemes as far back as 1990. It is yet another painful day in the subject of GMP equalisation – administration systems and processes are going to be really put to the test.”
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