GMP Equalisation – potential impact if you’re seeking advice on your Defined Benefit pension
Introduction
This case involves a longstanding issue for defined benefit (DB) schemes regarding the equality of benefits provided to men and women. It has potential impact on those providing advice in connection with DB pension schemes and transfers from them.
The case was brought by the trustees of three of the Lloyds Bank pension schemes, which sought a ruling from the court in response to claims from a number of female members of their schemes. The court was asked to rule on whether there was an obligation to equalise benefits and, if so, what method should be adopted in order to do so and whether there should be any time limits imposed on a member’s right to claim in respect of previously underpaid benefits.
The problem with GMPs is that they are payable at different ages and accrue at different rates for men and women. When combined with the typical benefit structure of a DB scheme, the unequal GMPs tend to cause total benefits to grow differently for men and women during periods of deferment and when pensions are in payment. Due to the complex relationship of variable factors, it is not easy to say whether males or females are the advantaged sex, and the advantage can switch from one sex to the other during the history of an individual pension.
Decision
The High Court has ruled that the trustee is under a duty to adjust scheme benefits in excess of GMPs to ensure that the total benefits received by male and female members with equivalent age, service and earnings histories are equal.
The ruling confirmed that while employers and trustees have some flexibility when choosing how to do this, the method adopted must not breach the “principle of minimum interference” and so cannot be more generous to members than necessary.
The judge held the only available way of achieving equalisation was to provide the better of male or female comparator pensions each year, subject to accumulated offsetting. Under this method, the annual pension payment of the disadvantaged sex is uplifted to that of the advantaged sex, but if the balance of advantage switches the prior uplifts received are taken into account and offset when calculating future payments. This requires shadow record keeping to work out what the member would have received had they been of the opposite sex and annual adjustments.
It was also held that a complete one-off actuarial equivalence exercise would also be lawful. This involves awarding the member an actuarially equivalent pension to that received by the advantaged sex, using the GMP conversion legislation to convert GMP into non-GMP. This was proposed by the DWP in 2016. However, this method requires employer consent, which has not presently been granted in the Lloyds case.
Impact
This case will have significant consequences for defined benefit schemes with GMPs. A rough rule of thumb for the impact of GMP equalisation is a 1-2% increase in annuity liabilities, but there is a huge amount of variability around this and it could be higher.
In practical terms, however, the impact will perhaps be felt most in terms of the future administration of DB schemes with potential costs of implementation ranging from £100 million to £300 million. Clearly, there is a dependency on the accuracy of the records held by the trustees. It remains to be seen how this influences the direction of DB scheme administration, and indeed risk management in this regard, in future.
However, it is possible that this will lead to some schemes temporarily suspending transfers in some cases whilst they figure this all out. The Local Government Pension Scheme has already done this is response to changes to discount rates so it is a strategy trustees may deploy.
The judgment confirmed that equalisation is to be extended to those schemes in wind up or at a buyout stage. There is no mention for retrospective action for those schemes that have since wound up
Next steps
The team at Longhurst hold the appropriate qualification to provide regulated pension transfer advice.
If you are concerned about any element of this article, or/and would like to speak to a Pension Transfer Specialist, please contact us on hello@longhurst.co.uk.
By transferring your occupational pension scheme benefits into a personal arrangement, you may be giving up rights to guaranteed benefits, known levels of pension income and increases that will be applied in the future.
A Pension is a long term investment the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
The Financial Conduct Authority does not regulated occupational pensions.
