GMPs – to equalise or not to equalise: that is the question…

Harpreet Boora

Now that the High Court hearing is over, what was it about and what can pension scheme trustees be doing in preparation if the High Court rules that some of the Lloyds Banking Group defined benefit pension schemes need to equalise overall scheme benefits for the effects of unequal GMPs?

Background

For many years, the government and the pensions industry have been talking about what, if anything, to do about the complex issue of guaranteed minimum pension (GMP) equalisation. However, it has proven far too difficult to work out what should be done and how.

Following the European Court of Justice ruling in Barber v Guardian Royal Exchange Assurance Group (1990), trustees of pension schemes have been required to pay equal benefits to comparable men and women in relation to service from 17 May 1990. However, the law has not been clear about whether GMPs should also be equalised, or how this might be done. As a result, nearly all schemes have not equalised for the effects of unequal GMPs and the gender inequalities that exist because of GMPs still remain today.

Last week, 28 years after the Barber ruling, a High Court hearing considering the issue of GMP equalisation came to a close. The High Court’s ruling could have widespread implications for thousands of other defined benefit schemes.

What are GMPs and why are GMPs unequal?

GMPs are a minimum level of pension broadly equal to the State Second Pension or State Earnings Related Pension Scheme (SERPS) which must be provided by schemes if they contracted out of the State Second Pension or SERPS between 6 April 1978 and 5 April 1997. Contracting-out meant that both the employer and employee paid lower National Insurance Contributions and employees built up a lower level of state pension. In return, an employer’s pension scheme had to provide members with a minimum level of pension, the GMP.

In the past, State pensions were paid to men and women at different ages. This is still the case for GMPs. As a result, women and men built up GMPs at different rates and their GMPs are payable at different dates.

GMPs also become unequal for a number of other reasons:

  • GMPs are normally higher for women than men;
  • the revaluation rates for GMPs are usually higher than the revaluation rates in respect of non-GMP benefits; and
  • the pension increases applied to non-GMPs in payment are often higher than pension increases applied in respect of the GMP.

What were the High Court proceedings about?

The Trustee began proceedings under Part 8 of the Civil Procedure Rules last year.

The two key questions put before the High Court by the Trustee were as follows:

    1. Is the Trustee required to equalise the Schemes for the effects of unequal GMPs
    2. If so, is there a single correct method for achieving equalisation or are there a number of methods the Trustee can choose from to achieve equalisation?

A number of different methods for achieving equalisation were put before the High Court as were other issues which will be of interest to other pension scheme trustees including:

  • if there is a GMP equalisation obligation, what back-payments should be made to members in respect of underpaid benefits;
  • if the selected GMP equalisation method has a greater implementation cost for a member than the uplifted benefit he or she would receive, can an alternative method of equalisation be used; and
  • if the Trustee is under a GMP equalisation obligation, does it apply to benefits that have been transferred out of the Schemes into other pension arrangements and vice versa?

Whilst these additional issues were raised as part of the High Court hearing, it is not yet clear whether Mr Justice Morgan will give a ruling in respect of these additional issues.

What can other pension scheme trustees be doing now?

Ahead of any High Court ruling, what steps can pension scheme trustees take to ensure they are ready if the High Court rules that the Schemes need to be equalised for the effects of unequal GMPs?

Reconcile member data with HMRC – Given that the deadline for reconciling GMP data with HMRC is close by, trustees must ensure that they do not run out of time and are able to complete their GMP reconciliation exercise before the December 2018 deadline. Although some industry figures are urging HMRC to extend the deadline, there is no guarantee that this will happen. GMP reconciliation therefore has to be a number one priority for trustees.

Data cleansingIt is becoming ever more important for schemes to ensure that their data is fit for all future purposes. 2018 scheme returns now also include a new question asking trustees to provide their common and scheme-specific (conditional) data scores. Therefore, as it is likely that most pension schemes with low scores will be carrying out some form of data-cleansing exercise, it would be sensible for such exercises to also cleanse any historic data that might be required if schemes need to equalise for the effects of unequal GMPs. The relevant historic data covering the period between 17 May 1990 and 5 April 1997 that might be required could include: (i) pensionable service dates, (ii) working hours; (iii) periods of absence; and (iv) details of pensionable salaries during this period. Trustees need to be confident that they have the correct historic data in the event they are required to equalise schemes for the effects of unequal GMPs.

Communicating with members – It is important that trustees also give some thought as to how best to communicate with members and consider what they should be saying to members now and following any High Court ruling. Now that the High Court hearing is over and there has been press coverage about the issue, it is likely that members in other schemes might start to ask their trustees what implications the outcome of the High Court hearing might have for them and their benefits.

What happens next?

The outcome of the High Court hearing is not expected until later this year. It has been a long time coming, but later this year, we may have some certainty, at least from the High Court, as to whether schemes need to be equalised for the effects of unequal GMPs.

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

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