Equalisation of guaranteed minimum pensions: a blessing or a curse?

Jason Shaw

GMP equalisation has long been the ‘elephant in the room’. Whether guaranteed minimum pensions should be equal for men and women, when the State pension they replace is not, is an issue that has, for one reason or another, remained unresolved in the 20 years since the Barber decision. That, however, looks set to change. Following Angela Eagle’s announcement in January of last year, the DWP is expecting, probably this autumn, to publish new draft legislation on the issue of GMP equalisation.

Whilst the new legislation may provide some welcome clarity on the subject, from the point of view of a pensions litigator who has spent much of his career dealing with the fallout from the Barber decision, I can’t help but wonder whether GMP legislation (and any associated guidance) will give rise to a host of new problems for pension schemes – in much the same way as the Barber judgment did.

What about those few schemes that have been proactive and already tried to equalise GMP benefits? What happens if their GMP exercise falls short of the new requirements? To what extent will schemes be required to revisit earlier GMP equalisation exercises? To be fair, I don’t think there are many schemes that have jumped the gun, except perhaps on scheme wind-ups.

One real issue that jumps out at me is the cost of the equalisation exercise and who will meet it. An GMP equalisation exercise is likely to leave schemes with a significant bill. You have the administrative costs of the check on benefits coupled with back payments to pensioners in payment (plus interest or other compensation for late payment). The cost of the exercise will fall on the scheme and, ultimately, the scheme’s sponsoring employer. I can see questions cropping up about the rights of members who have transferred out of, or into, a scheme, or whose benefits have already been bought out with an insurance company. Who wins, and who pays?

With transfers, it is not uncommon to see receiving schemes refuse to accept a transfer without a “GMP indemnity” from the transferring scheme, as was the situation in the Pensions Ombudsman case of Barnett. Do schemes need to dig out old transfer terms? Even where indemnities were given, how many have expired since?

Apart from transfers, disputes could arise in relation to benefits that have been bought out with insurance companies. Some buyout agreements may be silent on the issue of GMP equalisation, some will exclude the GMP equalisation risk and some insurers, usually in exchange for an additional premium, will accept it. I predict the GMP equalisation exercise will result in some dusting down and careful dissection of buyout agreements to see who will have to bear the cost of GMP equalisation.

The legal issues arising out of any legislation and guidance on GMP equalisation are likely to be many and varied, but they may still not be a patch on the practical problems!

Jason Shaw is a senior associate at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

Read comments below or add a comment
  1. Pensions Bear says:

    I suspect that, for all but the most recent and the largest value buy outs sleeping dogs will be left to lie in respect of GMP equalisation – with both the insurer and trustee having got on with their lives and members blissfully unaware of the issue. An interesting sub-category will be those policies where the insurer has accepted GMP equalisation risk – will the insurer proactively go back and check its contracts and compare any increased/new legal obligation to what it has done or will these dogs remain sleeping also?

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