This was one of the last unresolved equal treatment issues and was recently clarified by the High Court in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank Plc & Ors.
Employers and employees found it attractive to contract out, as they paid lower NI contributions. However, men and women who contracted out of the state pension scheme with GMPs are currently treated differently as a result of the way GMPs are calculated.
This is relevant to formerly contracted out defined benefit schemes with GMPs and some money purchase schemes with GMP underpins.
The requirement for trustees to equalise benefits for men and women applies to GMPs in respect of service between 17 May 1990 and 5 April 1997.
The lengthy judgment in the Lloyds case looked at four different methods, with variations, to equalise GMPs. Methods B, C1 and C2 all provided for equivalence in relation to benefits.
The judge ruled that the employer could require the trustee to adopt method C2, relying on the principle of minimum interference, ie providing the minimum of what is legally required and having regard to costs. Broadly, method C2 looks at the better of male or female comparator pensions each year, allowing for interest and subject to offsetting accumulated pension paid to date.
Schemes will be required to hold two records in respect of each member, so there will be additional administration costs.
Please note that there will be some legal uncertainty until we know whether the judgment will be appealed.
The judgment also stated that if the employer agreed, then a further method, D2, which uses the GMP conversion legislation to convert GMP to non-GMP benefits, could be considered. Changes to legislation may be made to facilitate this.
The rate of interest for method C2 is 1% over base rate simple interest.
Beneficiaries are entitled to receive arrears of payments due to them. In principle, there is no relevant limitation period for these to be claimed.
Each scheme's rules will need to be reviewed to check whether beneficiaries are entitled to receive arrears of payments for more than the period of six years before their claim to be paid the arrears. Some schemes have a six year limit in their rules, whilst others give discretion to the trustees to decide on the period for arrears of payments. This means that arrears could be paid going back to 17 May 1990.
Members who have transferred their benefits out of the scheme were left as an issue to be considered separately by the High Court, at a later hearing. Other issues that were not considered were how to deal with trivial commutation lump sums and serious ill-health lump sums, which require all benefits to be extinguished under the pension scheme.
The market view is that GMP equalisation could add 1%-4% of liabilities to each pension scheme, but this will vary from scheme to scheme. The cost is very specific to a scheme's circumstances and membership. The total cost across all pension schemes is estimated as £15 - £20 billion.
If you have:
ask your TLT legal adviser to review your agreement and check how GMP equalisation is dealt with under the agreement and check the trustees' indemnities.
Ask your TLT legal adviser to review your pension scheme, to understand how the Lloyds GMP equalisation case impacts you. Then, working closely with your legal advisers, actuary and scheme administrator, agree a detailed project plan to deliver GMP equalisation, including member communications.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions