Some of the questions we have been asked this week in relation to GMP equalisation, include –
Do we have to equalise for GMPs?
How do we do this?
Do we have to make back payments?
What should we tell our members?
How do we deal with outstanding and new cash equivalent transfer value requests?
These are all valid questions. Unfortunately, not all of them can (or should) be answered immediately!
First of all, a bit of background
Prior to 6 April 2016, pension schemes could be contracted-out of the state second pension. Between the years 1978 and 1997, the contracted-out element of a member’s pension was called the guaranteed minimum pension (GMP). This was broadly equivalent to the amount of state pension being given up by the pension scheme member via contracting-out in return for the payment of lower national insurance contributions.
So, how does the equalisation issue arise?
GMPs are inherently unequal as between men and women. Because GMPs were intended to broadly reflect the amount of state pension being given up by the member, GMPs accrued at different rates for female members (who reached state pension at age 60) and male members (who reached state pension at age 65). In addition, other inequalities can emerge over time; the main reason is that the rates at which the GMP element of pension and the non-GMP element of pension are increased and revalued are different.
Pension scheme trustees have known since May 1990 that they must provide equal pension benefits for men and women in respect of pensionable service accrued on and from 17 May 1990. However, as the amount of a GMP is set out in statute, trustees have not been able to unilaterally equalise a member’s GMP . The question, therefore, has been whether other scheme benefits should be adjusted in order to equalise for the effect of GMPs. On 26 October 2018, the High Court confirmed in no uncertain terms in the Lloyds Bank case that trustees should adjust other pension scheme benefits in order to equalise for the effect of GMPs.
What issues were decided by the court?
The court decided that:
- Trustees must adjust total scheme benefits to remove the inequality caused by GMPs
- Trustees should use a method that results in minimum interference with the rights of any party (unless they consent)
- Trustees must make back payments in respect of pension that has been underpaid (at least for part of the period of underpayment)
- The period over which back payments are to be made is not limited by statute but could be limited by the scheme rules
- It would be appropriate for back payments to include simple interest at 1% above base rate
Will the decision be appealed?
We don’t know yet.
What else do we not know yet?
At the suggestion of the parties, the court held over making a decision on some particularly tricky questions, not least, what to do about historic transfers out. It is likely that a further hearing and a further judgment will be needed to address those points.
What actions should trustees be taking at the moment?
- Don’t rush – take a careful and considered approach. It is possible that elements of the judgment could be appealed, in which case it would make sense to wait and see, so far as possible, how that might change things. Likewise, we don’t yet have the court’s supplemental decision and there may be new DWP guidance to follow. It has been 21 years since GMPs ceased accruing, so another couple of months won’t have a material effect.
- Start planning how to equalise for GMPs. Seek actuarial and legal advice on what will work for your scheme using the guidance the court has given.
- Start liaising with the employer on the method to use.
- Think about having a stock response to queries from members (rushing out an announcement to members at this stage may generate more queries than it deflects).
- If you’ve got outstanding CETVs, or receive any new requests for CETVs, take legal advice on your options.
One thing we are comfortably confident about (but may have to eat our words if they don’t prove to be true) is that the broad principle will not change – trustees will have to take action to equalise for GMPs. We will be considering this issue some more at our forthcoming breakfast seminars being held in Manchester on 7 November, Leeds on 22 November and Birmingham on 29 November. If you would like to attend any of these seminars please register in this link.
Happy 40th birthday, GMPs!