Pension Funds Insider

Pension Funds Insider brings the latest pensions news and industry insights; from investment and governance updates to new mandate appointments and pensions regulatory information.

How to solve a problem like GMP equalisation

Image for How to solve a problem like GMP equalisation pension funds

The High Court handed down its decision in Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank plc and others at the end of October. The decision provides long-awaited clarification that there is a requirement to equalise for the effect of guaranteed minimum pensions (GMPs), and approves methods to achieve this.

From 6 April 1978 until 6 April 1997, individuals could accrue an entitlement to an earnings-related addition to their basic state pension, called the State Earnings Related Pension Scheme (SERPS). An employer could contract its scheme out of SERPS if it was designed to provide a pension at least as good as a statutory minimum, known as the GMP. The GMP is therefore a component of a member’s total scheme pension. The method for calculating GMPs is set out in legislation and can, for a variety of reasons, result in inequality.

The Barber case in 1990 confirmed that occupational pension schemes were required to treat men and women equally. As a result, schemes “equalised” their retirement ages, often at age 65, and adjusted their benefits accordingly. However, the position on GMPs remained uncertain. Two government consultations aimed at addressing the problem were run in recent years, but resolution of the issue was put on hold pending the outcome of the Lloyds case.

So what do we now know?
It is now clear that schemes must equalise for the effect of GMPs, and that this duty only applies to GMPs accrued post-Barber (i.e. from 17 May 1990).
Various methods of effecting equalisation were examined, and approved (including, to the relief of many, one which includes a one-off actuarial calculation and statutory GMP conversion). In determining the appropriate equalisation method on the facts, the judge applied the “principle of minimum interference”. This requires the court to “compare possible options and to consider, in relation to any particular option, where the obligation to provide equal benefits can be complied with in some other way involving less interference with the rights of any party”.  As a result, it found that the Bank could require the trustee to adopt “method C2” (as it was less costly than some of the others and did not interfere with members’ rights). Broadly, this method provides the better of male or female comparator pensions each year, subject to accumulated offsetting, and allows for interest “when comparing accumulated gains and losses in the case of a switch in calculation from one sex to the other. 
In addition, the judge confirmed that the period for which scheme members are entitled to receive arrears of payments is governed by the scheme rules. There is no relevant statutory limitation period.

Unanswered questions
The decision did not cover:
·  how transfers out should be addressed.
·  whether a de minimis threshold could apply, for example where the estimated cost of calculating and implementing equalisation is greater than the additional benefits to which the member would be entitled. 
·  how previous buy-outs should be dealt with
·  the position of DC benefits with GMP underpins. (Under legislation, it is not possible to convert a GMP into DC benefits.)

What should schemes be doing?
While there is currently no indication that the decision will be appealed, this may not be certain until early 2019. In addition, the Government has yet to declare whether it will be legislating to assist trustees and employers with implementing the decision. 
Schemes should react practically and prudently until the position becomes clearer. Trustees need to decide, with assistance from their advisers, how to keep the wheels turning in the period before benefits can be equalised.

Katharine Swire, Senior Associate, Sackers.