GMP equalisation – a decision at last

The High Court has ruled in a recent decision^[1] that pension schemes must equalise overall pension scheme benefits for the effect of unequal Guaranteed Minimum Pensions (GMPs) between men and women. The landmark judgment is expected to increase the liabilities of many pension schemes and is expected to cost Lloyds Banking Group £150 million.

Background

Since April 1978 schemes have been able to contract out of the second tier of the state pension. In contracted out schemes, employer and employee National Insurance costs were reduced in return for members receiving a pension from an occupational pension scheme of a guaranteed minimum amount (the GMP).

GMPs are unequal in a number of ways, most notably because full GMP entitlement is built up at age 60 for women and age 65 men. Although GMPs ceased to build up on 5 April 1997 they remain in many schemes today.

Since the Barber judgment^[2] in May 1990 schemes have been required to provide equal benefits to males and females. However, there has remained uncertainty as to whether this applied to GMPs.

In the Lloyds case the High Court was asked to consider two main questions:

1. Are trustees required to equalise for the effect of GMPs?
2. If so, what method should be adopted to equalise benefits?

Decision

The Court held that the trustee was under a duty to equalise benefits for men and women in respect of post May 1990 service.

Methods

Eight possible methods were put to the Court which could be applied to achieve equalisation. The judgment stopped short of specifying a single approach that should be adopted but did confirm that a number of the methods put forward would be ‘permissible.’

This included the method termed ‘C2’ which involves paying the better of the male or female pension on a year-by-year basis and allowing the offsetting of accumulated gains with interest in cases where the better-off sex changes over time. Trustees may also elect to take the GMP out of the benefit altogether under GMP conversion legislation under method ‘D2.’. This is permissible provided sponsor consent is given and the converted benefit is of no less value than the value of the benefit including the GMP.

Arrears

The Court held that no statutory limitation period applies when paying members arrears of pension. However, the rules of a scheme may limit the period of time in respect of which arrears are payable. In this case the rules allowed for forfeiture of unclaimed benefits after six years. Interest will also be payable on arrears of payments with 1% over base rate being an appropriate (simple) interest rate in current market conditions.

Action

The job of equalising GMPs may take a number of years. However, there are a number of steps that trustees will need to take in the short term. These include the following:

• Legal advice: taking legal advice on the impact of the judgment for the scheme in question.
• Scheme funding: considering the impact of equalising GMPs on scheme liabilities. For schemes currently undergoing a valuation trustees and the company will need to agree whether to allow for the cost of equalisation and, if so, how.
• Accounting: sponsors will need to consider the accounting treatment of this issue and include a disclosure in their accounts.
• Administration: trustees will need to agree interim administration procedures for dealing with benefit crystallisation events including: 
  • considering if partial transfer values should be offered (so that a GMP top up can be provided later); and
  • considering the treatment of trivial commutation given that these payments extinguish a member’s benefits in a scheme.

More uncertainty?

Whilst the judgment has provided some certainty on whether there is an obligation to equalise GMP benefits, it has generated a number of further questions and areas of uncertainty. In particular, the ruling did not specify whether historic transfer payments will need to be revisited and uplifted or how to deal with members who have commuted their full benefit entitlements.

There is also uncertainty about whether a de-minimis threshold can be applied or if the duty to equalise applies where the cost of completing the calculations exceeds any possible uplift.

Finally, the judgment itself may also be subject to an appeal. It therefore appears that uncertainty over GMP equalisation will be around for some time to come.

[1] Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank PLC and others

[2] Barber v Guardian Royal Exchange Assurance Group