Readers will no doubt be aware of the recent High Court ruling in respect of the Lloyds Bank case and GMP equalisation.
GMPs accrue at a different rate for men and women to reflect the previous different State Pension ages of 65 and 60 respectively. By the age of 60 a female would have built up her full GMP, but a male would have to wait until age 65 before achieving this. If a female delayed taking her GMP until say age 65, it would be subject to increases. So, for two members of the opposite sex, equal in every other respect, e.g. same date of birth, same salary etc., and the GMP element of their total pension at age 65 would therefore be different, with the female’s GMP at age 65 being greater than the male’s.
The Court confirmed that GMPs accrued between 17 May 1990 (the date of the Barber judgement) and 5 April 1997 (the date GMPs ceased to accrue) should be equalised. It considered and commented on four different methods of equalisation, ruling out the more expensive options on the grounds of “minimum interference”, i.e. it would result in an unacceptable increase in the employer’s funding obligations.
The issue of backdating was considered, and the Court ruled that any arrears of underpaid pension must be paid as far back as 17 May 1990, unless scheme specific provisions state that members may only claim for a six year period. The interest on back payments should be at a rate of 1% over the base rate, calculated on a simple rather than compound basis.
It is understood that the DWP will now be considering the ruling and potentially offering further comment/ guidance on the equalisation methodology. Trustees/ employers would therefore be best advised to defer any decision until this happens.
In the meantime, what steps should be taken? The key short-term issue surrounds the payment/quotation of transfer values and whether these should be suspended. The industry consensus would appear to be that transfers should continue to be paid, as trustees are subject to statutory obligations in this regard. However, member communications should contain warnings that GMPs have not yet been equalised and that the overall transfer may be lower as a result.
From a scheme funding perspective, trustees who are undertaking actuarial valuations prior to GMP equalisation may require their Scheme Actuaries to set aside a provision for potential increases in scheme liabilities. Equally, and possibly sooner, company accounts may also require a similar provision.
From an administration perspective, schemes should finish reconciling their GMPs with HMRC but, once this has been done, potentially delay any rectification until such time as agreement has been reached on the equalisation methodology.
Since the initial judgement, there has been a further hearing regarding possible methods of equalisation and, in particular, the conversion method. Whilst further clarification is awaited, the judge suggested that, where GMPs are yet to be paid, they could be converted based on an actuarial analysis of pre and post conversion benefits, without having to equalise GMPs first. However, for GMPs that are currently being paid, they would first need to be equalised, prior to conversion.
This may prove to be an attractive, less time consuming and less expensive equalisation methodology, so watch this space. A further hearing is required to address other issues, including the position regarding past transfer payments and the extent to which they should be revisited.
Separately, TPR has announced that a new industry group has been formed to help pension schemes comply with equalisation. The group is being curated by the Pensions Administration and Standards Association, who will seek representatives across the pensions industry. Its focus will be to develop and provide best practice on issues arising from the ruling, from how to address missing data through to dealing with transfer requests and rectifying underpayments.