On 26 October 2018, in a long-awaited ruling, the High Court determined that defined benefit pension schemes will be required to equalise benefits for the effect of inequalities between males and females in respect of Guaranteed Minimum Pensions (GMPs) since 17 May 1990. Non-GMP pension accrued after this date has already been equalised following the Barber v Guardian Royal Exchange court case.
The ruling followed a case brought by three members of the Lloyds Banking Group pension schemes. Justice Paul Morgan determined that for the Lloyds’ schemes, not only would current pensions need to be corrected, but arrears should be paid with interest applied, 1% higher than the base rate.
As part of the case, several proposals on how to equalise GMPs were put forward. Although some of these proposals were rejected for the Lloyds’ schemes, the methods summarised below were found to be acceptable means of equalising GMP in general, although some may need the consent of the sponsoring employer. It is important to note that these methods are not equivalent and each will have its own associated administration and liability costs.
- Three subtly different methods are proposed which compare, on an annual basis, the GMP and non-GMP tranches for each sex with the chosen method specifying a way of determining the higher benefit which is to be paid.
- Calculate the pension payable to a male and a female on an annual basis and pay the higher of the two.
- The same as method B, except that there is a need to compare the accumulated pension entitlement on an annual basis for each sex. This allows the offsetting of over and under-payments. Two methods are proposed, with and without an allowance for interest in the comparison.
- An actuary calculates the value of the total benefit for a male and female separately. If the opposite sex value is greater, the excess value is converted into an additional pension. An alternative version of this method converts the entire GMP into an alternative format of pension. Only this alternative version has been deemed to be acceptable.Although the ruling applied specifically to the Lloyds’ schemes, it has provided an important contribution to the GMP equalisation debate. The Department for Work and Pensions is expected to provide guidance in due course with further comments on the different methodologies.
Another GMP exercise on the horizon?
As trustees of schemes with GMPs are acutely aware, large-scale exercises to reconcile GMP figures with HMRC have been ongoing for some time. Following the completion of this reconciliation exercise, schemes will also need to embark on a correction exercise to rectify the benefits paid to affected members.
Equalising GMP benefits will be another significant exercise that will need to be undertaken and the amount of effort required to do this should not be underestimated. It may be possible to do this in tandem with the rectification.
It is estimated up to an additional £20 billion of GMP liability could be created for all UK contracted out pension schemes and the effect on an individual scheme may be significant.
Next steps
The following areas may need to be considered in the short term:
- Transfer Values – any requests for transfer payment may need to be reconsidered.
- Company accounting – we are aware of a number of auditors who have requested consideration of the impact of GMP equalisation on accounting disclosures, although we believe it is too early to produce a meaningful estimate.
- Communication with members – some members may have seen press articles regarding this and may question the effect on their benefits.
- Liability management exercises currently in progress may need to be revisited.
Quantum will provide clients with further information regarding GMP equalisation when it is available and will be discussing the impact of this ruling with trustees to agree on an appropriate course of action.