Savers with pension transfer values close to £30,000 could find themselves having to take advice after their pensions are equalised in line with a recent court ruling.
In a court case in October the High Court ruled that trustees of the Lloyds Bank pension scheme must equalise benefits between women and men who have guaranteed minimum pensions because of contracted out benefits.
The ruling was considered a solution for a pension problem spanning almost three decades, and defined benefit schemes are now having to decide how to equalise the contracted out benefits of their members.
For members whose pensions are already close to the £30,000 threshold where financial advice becomes mandatory, the equalisation could mean they will now be obliged to pay for advice if they want to transfer out of their scheme.
Stephen Scholefield, partner at law firm Pinsent Masons, told FTAdviser the issue could adversely affect those with benefits valued at some £29,500.
He said: "The increase in their transfer may therefore be bad news, as the cost of the advice may exceed the additional benefit that they get."
So far some schemes have been able to quote transfer values that incorporate an adjustment for GMP equalisation, while others are still paying transfers on the same basis as before, and a few others have opted to halt pension transfers altogether.
Mr Scholefield pointed to added complexity with those not paying equalised transfers as it would become apparent only after the transfer was made that advice was needed.
He said: "Those that do not pay equalised transfers, but intend to top up later, will need to think about whether and how to factor this into the assessment of the value of the member’s benefits – which would need some careful explaining."
Sir Steve Webb, former pensions minister now director of policy at Royal London, predicted savers with £30,000 pensions would not be able to get affordable advice, therefore the most likely result was no transfer.
He said: "It's another sign the £30,000 threshold is too low. There are plenty of people of small pots for whom advice isn't affordable."
Andrew Boyt, pension transfer specialist and freelance consultant, agreed the situation could prove tricky for those affected.
He said: "Someone with a cash equivalent transfer value of £29,999 isn't obliged to take advice, someone with a CETV of £30,001 has a statutory requirement to seek advice before transferring, and may incur costs upwards of £750 for the pleasure.
"The arbitrary nature of the figures is the issue which needs to be addressed, Merely increasing the figure from £30,000 to say £35,000 opens a whole new can of worms as this will itself create a new hinterland of marginal cases."
Mark Williams, principal and London retirement practice leader at consultancy Buck, expects about 5m people to be impacted by this across the UK, although he added there were no statistics available to back this up.
The problem captures mainly people with transfer values between about £29,000 and £30,000 who built up GMP in the 1990s.
Mr Williams said the best practice would be for scheme trustees to take a case by case approach.
He said: "If the actuary considers it likely that GMP equalisation will tip a member over the £30,000 limit, trustees may wish to apply an adjustment to the transfer value (and then require them to take advice).
"It may be tempting to simply apply a loading to all relevant transfer values over £29,000 to bump them over the limit.
"However, care should be taken as the £30,000 threshold applies to the statutory minimum transfer value, and therefore it must be clear that any addition represents the ‘best estimate’ of the impact of GMP equalisation."
Sir Steve and Mr Williams agreed it would be most helpful to have some guidance from regulators on the impact of this court case.
Sir Steve said: "My view is that The Pensions Regulator, the Department for Work and Pensions, the Financial Conduct Authority, HM Treasury and HM Revenue & Customs should get together and tell people what on earth to do about GMPs, within reason. We do need consistency."
The FCA has been approached for comment.
Mr Williams added there was a third Lloyds judgment due in the Spring, which is expected to provide some information on transfers – so it was possible that some guidance would be provided then.
maria.espadinha@ft.com
