28 years on, GMP equalisation becomes clearer
The High Court has today ruled that pension scheme trustees are under a legal obligation to equalise guaranteed minimum pension benefits. The ruling will have a significant effect on many schemes, increasing their liabilities if the scheme was contracted out of the SERPS state pension in the period May 1990 to April 1997. The total cost is not clear, but will run to billions of pounds across the UK pensions industry and the Department for Work and Pensions and the Treasury joined the case to make submissions to the court.
The ruling comes in the long-awaited judgement in the case involving several schemes sponsored by Lloyds Bank and addresses a number of questions that have dragged on unanswered for decades in the pensions industry. But the decision does not address all of the questions and a number of issues will need scheme-specific advice and/or further litigation.
By way of background, the European Court ruled in May 1990 that private sector pension schemes had to provide the same rights and benefits to men and women. That ruling did not apply to state pensions which had unequal retirement ages in many EU countries, including the UK.
But the UK had one special feature that other countries did not have – contracting out. Contracting out allowed employers and employees to pay lower National Insurance to the social security system. In return the employees did not build up a SERPS pension but their employer's scheme had to provide a benefit that broadly matched it – a guaranteed minimum pension, or GMP. GMPs contain inequalities between benefits provided to men and women, most notably because women are entitled to the pension at 60 and men 65, but the differences become more complicated when revaluation and indexation are taken into account. At different stages of retirement men may get a better GMP and at others women get a better benefit. Contracting out changed in April 1997 and for service after that date pensions for contracting out were equal between men and women.
GMPs are often not the whole of a member's pension – the scheme usually has a pension in excess of it. Most schemes have kept the inequality in GMPs between men and women, but have equalised the overall pension payable on the day of retirement. It is extremely difficult to equalise GMPs as the entitlement and calculation methods, including the lack of equality between men and women, is set out in legislation. When schemes wind up and buy annuities the usual practice has been to "level up" GMPs in some way and when they fall into the PPF the compensation payable is equalised.
In a lengthy judgement running to 176 pages, including appendices, the High Court has ruled on the key question that schemes must provide equalised benefits, adjusting the excess over GMP upwards to provide that total benefits received by male and female members with equivalent age, service and earnings histories are equal. They must also pay arrears, although there is scheme-specific detail to consider on how to approach arrears that are over 6 years old.
The court considered 4 main methods by which equalisation could be implemented in an ongoing scheme, some of which then had detailed variations. The Court ruled that trustees cannot, without employer consent, adopt more expensive options than the minimum necessary to provide equality. While not endorsing one single option the Court did rule that the employer could require the Trustees to adopt the least expensive option, which included not levelling up year by year where the overall accumulated pension since state pension age had not yet exceeded the opposite sex's.
This is complicated at first, but can be explained with worked examples and visual presentations. All trustees of schemes which contracted out between 1990 and 1997 should expect to see such presentations at their next trustee meeting.