UK - Insolvent schemes in wind up can exploit a legal loophole to reduce their commitments to deferred members and increase their GMP payouts, lawyers say.
Schemes are giving equal priority to GMP and deferred member payments but legally need not do so, claims Hammond Suddards Edge partner Francois Barker.
He says there is a disparity over how liabilities should be prioritised during wind up between the Pensions Act 1995 and individual scheme rules.
According to the common interpretation of the Pension Act, schemes must settle their liabilities in line with the schedule of priorities set out under MFR rules. These state that GMP and deferred member payments must be split.
But Barker disagrees with this interpretation and says the requirement is for trustees to simply allocate assets in line with their scheme’s own rules.
And if an individual scheme’s rules state that GMP payments can be made ahead of deferred member payouts, then the Pensions Act can be legally ignored, he said.
Hammond Suddards Edge solicitor Philip Sutton added: “When it comes to using each member’s allocation of assets to secure benefits, we believe the individual rules of each scheme may still be relevant. Section 73 of the Act only applies to wind-ups which have begun since April 5, 1997.”
Most scheme rules favour full payment of GMPs before deferred payments are begun, Sutton added.
Higham Nobbs partner Russell Agius said that this was one of many instances of ambiguity in wind-up regulations which can only be resolved by considering each scheme’s specific rules.
“Securing liabilities on the proposed basis, by working down the relevant scheme specific priorities, would help to alleviate difficulties where there is insufficient money to fully secure GMPs,” he added.
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