Government proposes method for equalising GMPs

Formerly contracted-out schemes have for some time anticipated an increase in their liabilities as a result of a possible need to equalise benefits for the effect of unequal Guaranteed Minimum Pensions (GMPs).

However, in the absence of workable guidance from the government – and even definite confirmation that GMP equalisation is necessary – most ongoing schemes have parked the issue for consideration at a later date.

Having been on their ‘too difficult’ pile since early 2012, and perhaps prompted into action by the referral of a Lloyds Trade Union tribunal case to the High Court, the Department for Work and Pensions (DWP) is now consulting on a new method for schemes to equalise for the effects of GMP – which could be used by schemes in combination with existing regulations (updated as appropriate) to convert GMPs to other scheme benefits.

What is GMP equalisation?

The 'Barber judgment' sets out that under European Union (EU) law, effective from 17 May 1990, workplace pension schemes are not able to provide different benefits to men and women. 

GMPs are a benefit that contracted-out schemes were required to provide in respect of benefits accrued before 1997, to replace the state pension benefits being given up. As a benefit derived from unequal state pensions, it has been far from clear whether schemes are actually required to equalise benefits for the effect of unequal GMPs.  However, recent governments have been convinced that equalisation is required.

Equalising GMPs involves making sure that members’ benefits are at least as generous as they would be if their pension benefits had been calculated on the basis that GMP (earned between May 1990 and April 1997) had been due to someone of the other sex.  Differences between the calculations for men and women arise because GMP for a man is payable from age 65 while GMP for a woman is payable from age 60, and the value of the benefits is affected by the rate of increases before and after this age. In addition, the rate at which GMP is accrued is faster for women than for men.

The proposed method

The proposed method is a one-off calculation which compares the value of the member’s future benefit payments with the value of these benefits had they been of the opposite sex. The greater of the two is then used, with the GMP portion of the benefit then be converted into a non-GMP pension.

The consultation suggests that other pre-1997 benefits could be converted at the same time, giving opportunities to reshape scheme benefits for ease of administration, or in preparation for a buy-in or buy-out.

The equalisation uplift for an individual member will depend on factors including scheme retirement age, increases on non-GMP pension and proportion of pension which relates to GMP. Overall, however, we could see average increases of up to 3% in schemes’ liabilities as a result of equalising for GMPs.

It is pleasing that the DWP has taken on board comments on the previous method proposed in 2012. The 2012 approach involved comparing the benefits for a man and woman in each future year and paying the higher of the two in each year. This was heavily criticised by the pensions industry because of the complexity and cost of implementing this method, and the fact that it could lead to some members receiving an even higher benefit than would be the case had they been a man or a woman.

Is this all really necessary?

As the requirement to equalise pensions (for the effects of) GMP stems from EU legislation, there is doubt as to whether these rules will still have to be applied in the UK following the ‘Brexit’ vote earlier this year.

The DWP does little to dispel uncertainty in its latest consultation – noting instead that, whilst a member of the EU, the UK is required to comply with EU rules. No mention is made of whether and how the UK would continue to adhere to the EU requirements in this regard following the UK’s exit.

Having said that, one wouldn’t expect the government to give its hand away on a matter of international significance in a technical consultation on GMPs!

What action should trustees or employers take now?

For the majority of ongoing schemes, it would be pragmatic to wait for the government’s response on this consultation before taking any action to equalise GMPs. In the meantime, schemes should ensure that they are making progress with reconciling their scheme’s GMP records with HMRC’s before their 2018 deadline. This way, they will be able to begin the equalisation process, when the time comes, having identified the right individuals and with the correct GMP amounts recorded.

There may however be some schemes, such as those about to complete a bulk annuity transaction with an insurer, where it may be helpful to take the DWP’s new method into account when deciding how and whether equalised GMPs should form part of the transaction. Trustees should ensure they obtain legal advice on the method used in this situation.

The DWP stresses that they will not force schemes to use their updated method. Rather, they have set out a method of equalising GMPs that they believe meets the requirements of law and so would be reasonable for schemes to use. They do say that other approaches may be possible. Schemes should take their own advice on what might be appropriate.

It has been more than a quarter of a century since the Barber ruling and pension schemes are still grappling with the implications. Whilst this latest consultation might bring us one step closer to a conclusion, don’t expect the equalisation story to end any time soon.

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