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The High Court has published its judgement in the case of Lloyds Banking Group Pension Trustees Limited vs Lloyds Bank plc (and others). The case was concerned primarily with the requirement to equalise pension benefits for the effects of unequal Guaranteed Minimum Pensions (GMPs) – referred to colloquially (and in this update) as “GMP equalisation”, even though the GMPs themselves are not generally to be made equal.
The key conclusion of the court case is to confirm that formerly contracted-out pension schemes are required to equalise GMPs, and whilst there are several methods for doing this the Court has identified which it considers legally robust.
The issue of GMP
GMP affects schemes contracted-out on a salary-related basis between 1978 and 1997. The minimum pension benefit between April 1978 and April 1997 was intended to replicate the SERPS benefit given up by contracting-out. Government legislation dictated how GMP was to be calculated and when it would become payable. Since 1990, the law required pension benefits to be equalised between men and women except state pensions which would not be adjusted.
However, issues arose as the SERPS benefit being replicated by GMPs lead to inequality for men and women. For example, SERPS benefits become payable to men and women at different ages (65 and 60 respectively) thus the rate at which the benefit is accrued differs. European Courts have long concluded that pension benefits must equalise for the differences between men and women. This requirement has also been a part of UK Equal Treatment law.
Judge Mr. Justice Morgan ruled the following in relation to the Lloyds Pension case:
● The judge confirmed schemes are required to equalise for the effects of GMPs.
● Several methods for equalisation are permissible while others are not.
● The case considered 4 main methods of equalisation (see briefing note), each with up to three variants.
● Focus on method C2 – a relatively complicated year-by-year comparison of true and opposite sex benefits.
● D2 (equalisation and conversion on value basis) also possible, and likely to be popular for the majority of formerly contracted-out DB schemes. Existing legislation requires the sponsoring company to consent to method D2.
● Arrears will be payable. The look-back period will depend on what scheme rules say.
What should you do next?
The judge made it clear that the points raised during the Lloyds GMP equalisation case apply to “many occupational pension schemes.” While this ruling relates to current ongoing arrangements (not schemes either in windup of PPF assessment), all formerly contracted-out schemes are likely to be affected in some way.
● Agreeing approach to quoting and paying transfer values. Continuing to pay transfer values without allowing for GMP equalisation is permissible but not without risk. Alternative options include paying a subsequent top-up for GMP equalisation after an initial transfer has been paid. You could also temporarily suspend transfer payments until GMP equalisation is in place.
● Reviewing terms for buy-in and buyout policies under negotiation. Where allowance for GMP equalisation is made, trustees could ensure appropriate indemnities are in place.
● Discussing with actuaries how much should be reserved in the next set of Company Accounts to reflect costs of equalising.
● Liaising with scheme administrators to ensure that scheme GMPs have been adequately reconciled with HM Revenue and Customs’ (HMRC’s) records.
● Writing to members to inform them of plans regarding GMP equalisation and/or adding additional comments to standard member communications.
● Obtaining broad estimates for the impact of GMP equalisation on the scheme’s funding position.
Barnett Waddingham have insight that will help employers and trustees with their GMP equalisation. Click below to listen to our webinar which explains how GMP equalisation will affect you. For more information and support, get in touch with our experts.
For more information on the Lloyds Bank GMP Equalisation case, download our PDF below.