The moment of undeniable absolute sex equality is coming. Of course, I’m only referring to pensions, but the High Court’s recent GMP equalisation ruling feels like one of those defining moments. All connected to the pensions world will already be aware of the Lloyds’ ruling and I envisage a universe of cash-strapped sponsors shaking their heads at yet another hike in costs; especially those who are old enough to remember the previous iteration of equalisation in the ‘90s.
But first – a bit of background. A Guaranteed Minimum Pension, or a GMP, is a pension payable to a member by a UK pension scheme that contracted out of the State Pension before 6 April 1997. A scheme that did so enabled its members and sponsor to pay less in National Insurance contributions each month in exchange for the member receiving a lower State Pension. The shortfall was made up by the pension scheme and held separately as “GMP”. It all sounds logical and you would be forgiven for assuming that this GMP system would play out with little fuss.
It quite clearly hasn’t. GMPs have caused administrators a variety of headaches since their introduction. Driven by the State Pension reforms in 2016, HMRC asked all UK pension schemes to reconcile their GMP records in a one-off mass record-keeping exercise, with a hard deadline of 31 December 2018. As expected, this proved to be another challenging, costly exercise. However, it does mean that the historic discrepancies that commonly crept up in day-to-day pension administration won’t in future and every scheme now knows it’s GMP obligations.
Turning to equalisation, in the ‘90s the State Pension was payable from 65 for men but from 60 for women, for whom it accrued at a faster rate to target the same pension for both sexes. UK pension schemes have been aware of the need to equalise GMPs for quite some time, but the problem was always how it would be achieved. The Lloyds Pension Schemes sought clarity on this, and on 26 October 2018 the High Court ruled that the Trustees must equalise the GMPs payable to their members.
This ruling has wider consequences – all schemes will now need to review and correct their GMPs – and of course any corrections will be in favour of the member. Now that GMP reconciliation projects (should) have concluded, the timing couldn’t really be any better to tackle rectification en masse.
The court considered several correction methods in the Lloyds case. However, whether a method is suitable for a pension scheme will depend on its rules, trustee/sponsor preference, the level of associated member interference and more.
Quite rightly, everyone wants to know “how much will it cost?”. The relative impact will be different for each pension scheme. The key drivers of cost will be the correction method used, scheme benefit structure and membership profile. Speaking very generally:
• A “better of” test will need to be conducted for each member, comparing their GMP to that payable to an equivalent opposite sex member. The higher benefit will be paid, meaning that a scheme’s total pension obligations can stay the same or increase. Costs will not reduce.
• Schemes that didn’t contract out of the State Pension or did so after 5 April 1997 will not be impacted at all.
• Schemes where GMPs are a high proportion of total pensions are likely to see larger increases.
• A range of expected liability increases have been seen to date and an estimate for your scheme can be requested from your advisers. Typical liability increases have been in the region of 0% to 10% of total scheme liabilities.
• Men will generally see the highest increases in corrected pensions. Schemes with a high proportion of men are likely to see larger increases in costs.
• If a pension scheme has a normal retirement age of 60 or earlier, the impact may not be as significant.
In the short term, legal advice will be essential. Schemes will need to think carefully now about quoting and paying transfer values. It’s unlikely that trustees will be in a position yet to pay transfer values with equalised GMPs, which is a problem as any payment needs to include the full and fair value of benefits. However, it is notoriously difficult to justify non-payment of transfer values, regardless of the circumstances. Subsequent top-ups could be paid to some receiving schemes but not all will accept them. Retirements appear to be less of an issue as corrections can be made later, unless trustees routinely secure pensions with annuity policies at retirement.
Trustees might want to acknowledge GMP equalisation in member communications and manage expectations – uplifts are likely to be modest on an individual level. Some sponsor auditors have asked for estimates of the increase to liabilities now, others are happy to just acknowledge the issue at this stage, but more work will be required next year.
In the long term, I suspect most trustees will want to be proactive without setting precedents. Equalisation doesn’t need to happen overnight, and reconciliation will need to be settled fully before starting.
The pensions community is eagerly awaiting guidance from the Department for Work and Pensions at which point trustees can start to look at a long-term plan. The judgement might still be appealed but any dreams of silver bullets should be ignored. The direction of travel is clear.
The road to sex equalisation was always going to be long and bumpy but, as we approach the 30th anniversary of the original Barber judgement, our distant destination is coming into focus. ●
Adam Cottrell, Consultant