The second part of the Union’s landmark legal case on Guaranteed Minimum Pensions (GMPs) will begin in the High Court early next year.
Members will recall the High Court ruled last year that the Trustee of the Lloyds pension schemes is under an obligation to equalise the benefits of male and female members to address the effect of unequal GMPs. The Trustee is currently identifying those members of the schemes whose pensions will be uplifted as a result of our landmark legal victory.
The Issue
Mr Justice Morgan will be asked to turn his attention to those members who have transferred-out of, or into, one of the Lloyds final salary pension schemes. The Court will be asked to determine who is responsible for paying the unequal GMP benefits: the scheme from which the pension came or the receiving scheme.
The Pensions Bonanza
The surge in transfers-out of final salary pension schemes followed the introduction of greater pension freedoms and the sharp increases in the cash equivalent transfer values on pensions, with some members being offered 50 times the value of their annual pensions. Those values started to fall back in early 2018 as gilt yields rose but research conducted by consultancy XPS, covering 1,800 transfers between June 2018 and March 2019, shows that members who transferred-out of final salary schemes received on average £275,000 in 2019, up from £235,000 in 2018.
In Lloyds thousands of members took advantage of those new freedoms and transferred their pensions out. We estimate that at least £2bn has been transferred out of the Lloyds schemes over the last few years. That will be replicated across all the big final salary pension schemes.
What Is It Worth?
In its simplest form, if a GMP uplift is worth £500 per annum and a pension scheme member was given 50 times his/her annual pension when they left the scheme then this case could be worth £25,000 to that member. Moreover, if you consider that millions of members have left final salary schemes over the last few years then the potential cost of this case for pension schemes up and down the country could run into the hundreds of millions.
The union will keep members informed of developments in the case through regular Newsletters.
Are You Getting The Right Pension Increase?
We recently received a letter from a long-standing member regarding pension increases. The full letter is set out below. The integrity of the pension increase calculations is dependent on the member’s pension being ‘split’ correctly. The Trustee has acknowledge that in the case below it wasn’t.
The Trustee has also confirmed that it is carrying out a piece of work to determine who is affected by these miscalculations and we understand that work is being given the highest priority.
We will keep members informed of developments through Advance.
“You may remember that I wrote to you regarding the ‘Underpin’. I have carried out my own research and I’m very glad I did.
The upshot is that in our case, my wife’s bank pension has not been increased in line with the scheme rules since she retired in 2015. She is a member of The Lloyds No. 1 Pension Scheme.
The bank has been applying the ‘Standard’ increase methodology to determine her pension increases when it should have been using the ‘Underpin’. This has now been put right and my wife is due to receive a lump sum back payment and an uplift to her annual pension.
I thought that I would share my findings with you as I would be extremely surprised if others are not similarly affected.
The issue could be applicable to male or female members of the pension scheme. The key date to remember is 1st November, 1983. The ‘Underpin’ applies to members who joined the pension scheme prior to this.
In my wife’s case the scheme records were wrong. Notwithstanding her annual pension increase letter had recorded her joining date as being prior to November 1983, the scheme administrator had recorded her date of joining as post November 1983. She actually joined in August 1975. I think that her move from the full time staff to part time staff in 1987 may have been the root cause of this error. In 1987 part time staff could not be members of the pension scheme. Part Time staff were finally admitted to the scheme in 1988.
The European Court subsequently ruled that excluding staff from occupational pension schemes amounted to indirect discrimination. As a result of that ruling and following a review by the bank part time employees were allowed to claim retrospective membership of the pension scheme.
In my wife’s case her 2 separate bank pensions were subsequently amalgamated and her date of joining reverted to 1975.
I would surmise that there were a lot of staff, probably the majority female who had returned to work after ‘children’ that might have been similarly affected.
By way of background, the ‘Underpin’ increase is a comparison of the ‘Standard’ increases applied to a pension against the full pre 1997 benefit (including the GMP) increased in line with RPI up to 4%, with post 1997 benefits increasing in line with RPI up to 5%.
To all intents and purposes, if RPI is below or equal to 4% the ‘Underpin’ is likely to be more beneficial. In the current low inflation environment that is more likely to be the case.
I have provided a worked example below:
Standard Increase Methodology
- GMP accrued prior to 6 April, 1988 – No Increase payable
- GMP accrued after 6 April 1988 – Increase by CPI max 3%
- Scheme pension – Increase by RPI max 5%
Underpin Methodology
- Pre 1997 Scheme pension – increase by RPI max 4%
- Post 1997 Scheme Pension – increase by RPI max 5%
Worked Example
The member pension comprises the following elements
- Pre 1988 GMP: £1000
- Post 1988 GMP: £1000
- Pre 1997 Scheme Pension: £7000
- Post 1997 Scheme Pension: £1000
(Assume CPI is 2% and RPI is 3.0% as it is currently)
Standard Increase calculated as follows:
Pre 1988 GMP: Increase 0.00% = £0.00
Post 1988 GMP: Increase 2.00% = £20.00
Pre 1997 Scheme Pension Increase 3.0% = £210.00
Post 1997 Scheme Pension Increase 3.0% = £30.00
TOTAL INCREASE: £260.00
Underpin calculated as follows:
Pre 1997 Scheme Pension (£1000 + £1000 + £7000): Increase 3.0% = £270.0
Post 1997 Scheme Pension (£1000). Increase 3.0% = £30.00
TOTAL INCREASE: £300.00
My advice to all members would be:
1. Contact the scheme administrator to check that it has the correct date of joining the pension scheme recorded. You can do this via email.
2. Check the annual pension increase letter carefully.
3. If you joined the scheme prior to November 1983 make sure the letter actually says that (on the reverse of the most recent letter in April 2019).
4. If you joined before November 1983 ensure that the ‘Underpin’ has been considered.”