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Equalisation of GMPs
Pensions Ombudsman's Determination - Equalisation Of GMPs Concern For Contracted-Out Final Salary Schemes
For further information, please contact Nilesh Dodhia at the Amersham office.
Determination
On 7 January 2000, the Pensions Ombudsman determined in the case of Williamson v Sedgwick Group Pension Scheme Trustee Limited (The Trustee) that Guaranteed Minimum Pensions (GMPs) in respect of service after 17 May 1990 (date of the Barber ruling) and 5 April 1997 (when GMPs ceased to accrue) should be equalised between men and women. The Pensions Ombudsman's determination is only binding in that case, but the determination has far reaching implications for all contracted-out final salary pension schemes.
Background
The case was brought by Mr Williamson (an actuary as it happens!) who alleged that the scheme had failed to equalise the GMP element of his pension and that the treatment of pension increases relating to GMPs constituted sex discrimination. In response, the Trustee and the Holding Company, Sedgwick Group plc, submitted that the Pensions Act 1995 did not require equalisation of GMPs broadly on the basis: (i) that the statutory provisions leading to inequality were passed before and affirmed by regulation after the 1995 Act, (ii) that it was necessary to look not only at the benefits of the scheme but at the totality of benefits including State benefits and (iii) finally that GMPs are not pay under Article 119 (now known as Article 141) of the Treaty of Rome. The Ombudsman objected to these arguments as:
- The Pensions Act 1995 expressly allowed for two exemptions where the inequality resulted. These were from the application of actuarial factors which differed between men and women and where the differences were due solely with bridging pensions.
- Parts of the judgment in the Barber case stated that "the application of the principle of equal pay must be ensured in respect of each element of remuneration and not only on the basis of a comprehensive assessment of the consideration paid to workers".
- After reviewing case law, the Ombudsman's opinion was that GMPs are pay for the purposes of Article 141.
The Ombudsman's Order
The Pensions Ombudsman directed that the scheme rules should be amended to comply with the overriding legislation in Section 62 of the Pensions Act 1995. This Section provides that all occupational pension scheme contain an equal treatment rule. The Pensions Ombudsman did not specify how GMPs should be equalised - leaving this for the trustees and their advisers to consider.
We understand that the trustees in this case are making an appeal to the High Court.
Example
A simple example illustrates the point.
The GMP targets a pension of 20% of "band earnings" (that is earnings between the lower earnings limit and the upper earnings limit) to members on retirement at state pension age. This pension is earned over the member's working life (i.e. from age 16 to state pension age). The main difference between the calculation of male and female GMPs is that for a male their retirement age is 65, whereas for a female it is age 60. Therefore the working lifetime for a male is five years longer than that of a female.
Let us consider an example of a 35 year old male who joined a pension scheme on 6 April 1996 and had a salary of £15,000. If the member were to leave the scheme on 5 April 1997 after only one year then his GMP would be £48 at this date. This is calculated as follows:
(Salary - Lower Earnings Limit) x 20% / Working Lifetime
= (£15,000 - £3,172) x 20% / 49 years
= £48
However, if this member were female then she would be entitled to a GMP of £54 at date of leaving, because her working lifetime is 44 years rather than 49 years for men. Because the GMP is a different amount, subsequent revaluation and pension increases could be different and this further complicates the equalisation issue.
Implications
It has been known for some time that calculations of GMPs have been unequal. However, as this inequality mainly resulted from provisions in the State scheme, it was hoped that the Government would put forward proposals to equalise them or that they would be exempted from the sex equalisation rule. In view of this, and also because of the technical and administration difficulties of doing so, most schemes have put off equalising GMPs. However, now that the Ombudsman has forced the issue it is necessary for the trustees to consider what action should be taken and this will depend to some extent on the circumstances of each scheme.
The two main options are to wait and see whether an appeal will be made to the High Court with the aim of obtaining a definitive ruling, or to take action now to equalise GMP benefits.
There are risks and costs with regard to each option. If the trustees wait and see there is the possibility that members may make successful complaints to the Ombudsman or the High Court in the meantime. On the other hand there is a possibility that, if the determination is successfully appealed, schemes will not have to equalise GMPs. There is also the possibility that the Government may introduce legislation allowing schemes not to equalise GMPs.
The difficulty with the second option is that there is no simple cost efficient way to equalise GMPs. The Ombudsman has made it clear that equalisation cannot be achieved in a way which might adversely affect some members of the scheme. Therefore, equalisation will mean that some members will receive a higher level of benefit and this will result in a cost to the scheme including the administration cost.
There are also a number of other issues that the trustees may need to consider including communication to members, the policy on accepting transfers into the Scheme, calculations of transfers out of the Scheme and whether to provide indemnities in such cases.
For further information, please contact Nilesh Dodhia at the Amersham office.
Nilesh Dodhia, February 2000.