Published by Adam Poulson on
Estimated reading time: 2 minutes
Whilst the Lloyds case has provided clarity that something needs to be done there are lots of options and companies need to take the lead in agreeing with trustees what is acceptable to them.
The judgment set out a number of options for equalisation but was very clear that its was within the employer’s remit to only agree to the cost effective approach of ‘method C2’ which relies on the ‘principle of minimum interference’. The judgement commented on four main methods of equalising benefits, A to D plus a couple of variations. Method C2 allows historic overpayments to offset future underpayments. What this means in practice is that companies need to ensure the lowest cost approach is followed by their pension scheme trustees.
The ruling also made it clear that any historic underpayments need to be made good. However, many pension scheme rules (including the Lloyds bank schemes) include a clause limiting and back payments, usually to six years. It is important that companies understand if this limit is in the rules of their pension schemes and to agree with trustees when the six year back payment period starts. This could be now, or it could be once the trustees have carried out the calculations necessary to work out any back payments. The later may be a year or two away yet and therefore would be result in a lower cost.
It is likely it will take many months or even years for the trustees of pension schemes to calculate the impact of this ruling on their members, and hence calculate a figure for how much the liability value and the scheme deficit will increase by. Given the long term nature of pensions it would seem appropriate for this amount to be wrapped up in the discussion at the next scheme funding valuation.
Audit firms have made it very clear that the impact of GMP equalisation now needs to be recognised on the company’s balance sheet at the next year-end, 31 December 2018 for many. In addition, unless a previous allowance for GMP equalisation has been made, it is likely this increase in liability value will need to be recognised as a prior service cost through profit and loss (P&L).
Given the complexity of the issues and likely unavailability of the requisite data, it is likely many companies are going to have to make an approximate allowance for this in their P&L this year. It is therefore important that where approximations are utilised, the resulting additional liability figure is a reliable best estimate and does not overstate the impact of GMP equalisation.
In summary as a sponsor of a defined benefit pension scheme impacted by the GMP equalisation ruling you will need to take the following actions (and number 4 is the one you need will probably need to tackle first!)