Within the next few weeks we expect to see a judgment in the High Court being handed down to a question that is nearly 30 years old. Whether this will give a clear decision or result in yet more cases is unknown but the present position as we see it can be summarised below.
Guaranteed Minimum Pensions (GMP’s) were introduced from 6th April 1978 as the contracted out equivalent of the State Earnings Related Pension Scheme. As state pensions were unequal in retirement ages between males and females, there is a strong argument that GMP rights should be treated in the same way. Sadly, the Government has previously not adopted this view and all schemes entering into the PPF have to equalise GMP’s.
2. Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank plc
A High Court judgment is expected to address a fundamental question as to whether it is necessary to equalise benefits for the effects of unequal GMPs and, if so, how. In July, Lloyds Banking Group launched its landmark defence against three female members of the Lloyds Banking Group pension schemes, who are claiming sex discrimination because their GMPs increased at a lower rate than male members.
3. Possible outcomes
The judgment should clarify whether trustees need to adjust benefits for differences between the GMPs for male and female members. If this is necessary, the judgment should also address whether this should be achieved through a single method or, potentially, a combination of different methods.
- Method 1 - the one preferred by the Lloyds schemes members is to compare the pension of an analogous male and female member each year.
- Method 2 - the proposal that the Government put forward in 2012, which would calculate the member's pension each year when an increase is due and at the same time calculate the pension if the member were of the opposite sex; and pay the higher.
- Method 3 - where a scheme would calculate annual increases in the same way as Method 2. But instead of automatically paying the higher pension to both members, it would consider the accumulated value of the pension paid to date.
- Method 4 - where a scheme actuary would not calculate pensions payable each year but would calculate the prospective value of the male and female pension that will be paid between now and the date of the members' (estimated) death.
4. Possible actions by trustees and advisers
- Do nothing – this option only exists if the GMP reconciliation and rectification work has been fully completed and signed off or if there is an appeal.
- Do something – if there is no possibility of an appeal and if the court clearly states a methodology. Before you can start any equalisation exercise it will be essential to complete the work on completing GMP reconciliation and rectification by the end of 2018 as required by HMRC. Given that this involves the 20-year period beginning in 1978, this is likely to mean a review of paper files or storage methods like microfiche.
5. Member communication
There will be a need to think about interim communication to members as this judgement will hit the press, even if the average person does not understand it.
6. The cost implications
If the judgment decrees that equalisation is necessary then regardless of the method chosen, we can be reasonably sure that the impact will add extra costs to the existing liabilities and adviser fees will be in addition. Ascot Lloyd are watching this case very closely and once the judgment is handed down we will be letting you know the likely implications. In the meantime, should you wish to discuss how this might impact on your pension scheme then please contact your usual Ascot Lloyd consultant or contact us directly on 01423 523311 and ask for a member of the pensions consultancy team.