The cost of equality
The implications of the Lloyds ruling on gender inequalities in Guaranteed Minimum Pensions
Following years of uncertainty around how to address gender inequalities in relation to Guaranteed Minimum Pensions (GMPs), trustees and employers of occupational pension schemes finally have a way forward. Affected members may ultimately see an uplift to their benefits but, contrary to some reports, it is likely to be some time before the final calculations are applied.
GMPs were a product of the earnings-related addition to the basic state pension – the State Earnings Related Pension Scheme (SERPS). Employers were able to contract out of SERPS if its occupational pension scheme provided members with a pension that met minimum levels – the guaranteed minimum pension. Contracting out meant lower national insurance contributions had to be paid and the provision of the GMP led to a smaller state pension.
The underlying legislative requirements on provision of GMPs created inequalities between men and women. This was largely as a result of inequalities in the state pension for men and women. As a consequence, payment of GMPs from 65 for men and 60 for women, along with other factors, such as the impact of increases, have caused differences in the ultimate benefits being provided to men and women.
The Lloyds Banking Group case, heard in the High Court in England, reached its conclusion at the end of October 2018 with a short supplementary judgement issued in December 2018. This makes it clear that there is an obligation on trustees of occupational schemes to equalise for the effect of GMPs. The case also addressed the thorny issue of appropriate methods to meet this obligation with regard to ongoing schemes. Key questions remain unresolved, however, with significant issues being considered by industry and government bodies, including the Department for Work and Pensions (DWP). HM Revenue and Customs has set up a working group to analyse a number of issues and the Pension Administration Standards Association has brought industry representatives together to develop and promote best practice guidance.
While an anticipated supplementary hearing may assist with specific points, it will be some time before the calculations can be finalised and the matter finally put to bed.
Since the judgement, many occupational schemes are already applying for a practical methodology to transfer payments
The inequalities involved in GMPs have been an issue since the Barber case, in which the European Court decided that pensions formed part of pay, and equality between men and women should apply from the date of that judgement, 17 May 1990. It was not clear, however, how the inequalities in GMPs should be addressed. Equality was usually addressed using a practical, reasonable method when pension schemes were being wound up and benefits secured. Equalising for the effect of GMPs was, however, put on hold for ongoing schemes while clarity on the approved method was awaited. The DWP put forward possible methods in 2012 and 2016 but the Lloyds Banking ruling overtook matters.
The Lloyds case involved companies within the Lloyds Banking Group, trustees of occupational pension schemes within that group, scheme members and trade unions. The DWP and HM Treasury joined as interested parties.
The judgement confirmed that there is a requirement to equalise main scheme benefits to account for the effect of GMPs (GMPs forming part of the overall scheme benefits). This requirement applies to benefits built up between 17 May 1990 and 5 April 1997 (when GMPs stopped building up). Provided equalisation takes place, the judge confirmed that, based on the principle of “minimum interference”, it need not be the most expensive method unless the employer agrees that a more costly method is appropriate.
Several possible methods were identified:
- A3 – each aspect of inequality is tested separately each year and is applied.
- B – an annual check is applied to the member’s pension for 1990-1997 service against an opposite sex comparator with payment of the higher amount.
- C1 – in line with method B but with an offset for past pension overpayments to equalise the cumulative pension.
- C2 – in line with C1 but with simple interest of 1% over base to past overpayments.
- D1 – a one-off actuarial calculation of the future rights of male and female comparators with the difference applied as additional pension.
Payment of GMPs from 65 for men and 60 for women, along with other factors have caused differences in the ultimate benefits being provided to men and women
It was also noted by the court (method D2) that enabling equalisation by converting all GMPs to “normal” scheme benefits under relevant legislation would be feasible. It is generally recognised that many schemes will actively consider this option – albeit that there are points of detail in the existing legislation that need to be ironed out to enable this to happen.
The judge decided there was no statutory limitation on the right to receive back payments. However, he did rule that if the scheme rules governed back payments these rules should be applied. Where there was such forfeiture wording in the Lloyds schemes this would take effect to limit any uplifts to members. In many pension schemes, the wording in the governing trust documentation deals with benefits that fall away if not claimed within six years. Depending on the specific wording trustees may be required to only uplift benefits in respect of the six years before the October 2018 judgement.
Whether this is an appropriate application of the scheme rules by trustees remains to be dealt with on a case-by-case basis. Where benefits were being calculated and paid on a basis which did not equalise for the effect of GMPs, members would be in the dark that uplift claims were available to them. Application of the forfeiture provisions is therefore an area still under debate.
Grappling with the issue of which method should apply, along with whether the forfeiture provisions should be applied in line with the judgement, will be a focus for trustees and employers.
Since the judgement, many occupational schemes are already applying a practical methodology to transfer payments. Some schemes are awaiting further clarity on transfers before going ahead. This is dependent on the scheme advisers’ approach, along with the employer’s view.
Past transfer payments and the need to revisit them remains a key focus and it is hoped a supplementary hearing will conclude on that point. Data quality issues will need to be worked through, while many schemes are still working on reconciling their GMP records.