The High Court has determined that GMP equalisation is required
In July 2018, the High Court was asked to consider whether the Lloyds Bank Group’s pension schemes had an obligation to equalise benefits for the effect of guaranteed minimum pensions (GMPs)1. The Court’s answer, published on 26 October, is a very clear “yes”.
The Court was also asked for guidance about which method should be used to equalise. Following the principle of “minimum interference” it has said that, of the methods proposed, the employer could only be obliged to agree to a least-cost method. The decision pointed to two approaches: one could be quite complex to administer, as it requires ongoing intervention; the other is to convert GMPs into “ordinary” scheme pensions in a way that protects value and ensures benefits paid out will be equal.
How can sex discrimination still arise in this day and age?
Since 1990, pension schemes have not been allowed to discriminate between men and women in the benefits they are paid. However, legislation still requires GMPs to be calculated differently for men and women. As a result, interactions between GMPs, the scheme pension, and how GMPs and scheme pension are increased, can potentially lead to otherwise identical men and women receiving different benefits.
A series of governments chose not to amend GMP legislation in order to remove or reduce the scale of the problem, leaving trustees and employers to address the potential sex discrimination that arises for all schemes with members that were contracted-out of the state earnings related pension on a defined benefit basis between 1990 and 1997 (when GMP accrual ceased).
However, the Court’s ruling has made clear that practice this results in sex discrimination and is unlawful.
All trustees and employers of schemes contracted-out during the relevant period are potentially exposed to the issues being considered in the Lloyds case. Addressing the inequalities in their schemes could be a very time-consuming process, although in many cases the increase in cost is likely to be small relative to schemes’ liabilities as a whole.
What should schemes do now?
Trustees of schemes that were contracted-out on a defined benefit basis between 1990 and 1997 will need to consider how they will react to the ruling. Although the ruling was clear about the need to equalise, and the approach to follow, the answers to some questions (for example, the need for backdating) were specific to the rules of the schemes in question, and others were not addressed (such as the treatment of previously transferred-out benefits). Trustees will need to take advice on the appropriate methodology and the implications for benefit payments and other calculations. Both trustees and sponsoring employers will also need to understand the cost implications for the scheme, and employers will have to consider any accounting consequences.
1 GMPs form part of members’ benefits if the scheme was contracted-out of the state earnings related pension scheme on a defined benefit basis prior to 6 April 1997.
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This article does not contain advice in respect of actions you should take. No decision should be made based on this information without obtaining prior specific, professional advice relating to your own circumstances.