Equalisation and Guaranteed Minimum Pensions

The High Court has handed down its judgement in a case concerning regarding equalisation of Guaranteed Minimum Pensions (“GMPs”).

Morgan J concluded that pension schemes which provided GMPs must equalise benefits provided by the scheme in order to address the inequalities arising out of GMPs.  

In the case, the judge recognised that GMPs themselves could not be equalised as they were a product of legislation. The question he had to consider was whether scheme benefits had to be equalised to allow for the inequality in GMPs. He used “GMP equalisation” as a shorthand way to describe this process and we will do the same in this update.

GMPs are a historic legacy for schemes which contracted out of the additional state pension in any period between 6 April 1978 and 5 April 1997. Historically, it was open to employers to set up an occupational pension scheme so that, in exchange for a rebate on National Insurance contributions, the scheme would provide an additional element to the scheme benefit, to replace the additional state pension. This was known as “contracting-out”. GMPs were replaced by the “reference scheme test” for the period from 6 April 1997 to the cessation of contracting-out on 5 April 2016.  

The requirement to equalise pension scheme benefits is a long-established requirement following the Barber judgement in 1990. The “Barber” judgement ruled that benefits under an occupational pension scheme must be equalised as between men and women. The requirement to equalise benefits applies in relation to pensionable service from 17 May 1990. As such, the requirement to equalise GMPs relates to pensionable service from 17 May 1990 to 5 April 1997.

So the question is, why are GMPs such a problem?  Under legislation, a woman’s GMP accrues at a faster rate than a man’s GMP. This is because, when GMPS were first established, it was assumed that a woman’s working life was five years’ shorter than a man’s.  Linked to this is the fact that a woman’s GMP is payable at 60, not 65. This difference in age at which GMPs are payable was described by Morgan J as the “root” of the equalisation problem.

Morgan J noted that the inequality in GMPs affected men and women differently at different points in time.  Revaluation benefitted a woman with a GMP more than a man. This is because different revaluation rates apply to GMPs and members’ benefits in excess of the GMP. However, once in payment, the GMP attracts a lower rate of pension increase than the excess over the GMP. This generally, but not necessarily, favoured men. Morgan J recognised that whether this was the case depended on whether pre-1997 pensions benefits from increases under a scheme’s rules.

• The questions raised in the case were:
• Whether there was an obligation to equalise GMPs;
• The methodology for doing so;

How past underpayments should be dealt with.

In considering the first question, Morgan J rejected the argument that GMPs a substitute for the additional state pension and were not pay. He concluded that the totality of a member’s pension scheme benefits were “pay” for the purposes of article 157 of the EU Treaty and there were no grounds for treating GMPs differently. Trustees were therefore obliged to adjust the benefits payable under the Scheme to ensure that total benefits were equal.

Morgan J then looked at the way in which benefits would need to be adjusted. He considered eight different methodologies split into four categories as follows:

• Method A: equalise each unequal aspect separately;
• Method B: provide the better of the male or female comparator pensions each year;
• Method C: provide the better of male or female comparator pensions each year subject to accumulated offsetting.  A variation of method C which allowed for interest to be allocated was also considered;
• Method D: complete one off actuarial equivalence.  A variation of Method D resulting in GMP conversion was also considered.

Methods B and D have been considered in DWP consultations on GMP equalisation and conversion.  Versions of Method D are commonly used in pension scheme buy-out transactions where liability to pay benefits is transferred from the pension scheme to a third party insurer. Morgan J observed that in a buy-out scenario, the commercial imperative to achieve risk transfer will outweigh the risks of the equalisation methodology being deemed inadequate. 

In considering the methodology to be applied, Morgan J considered the principle of minimum interference. “Minimum Interference” means that where there is more than one method which produces equality of benefits, trustees are obliged to choose the method which produces minimum interference with the rights of any party. Morgan J concluded that methods A and D infringed the minimum interference principles, method A from the Bank’s perspective and D from the members’ perspective. 

Having concluded that method C, allowing for interest payments and accumulated offsetting, achieved equality and met the minimum interference principle, Morgan J then considered whether the trustee was obliged to make back payments and whether interest should be allowed for.

Morgan J then went onto say that the position in relation to back payments was governed by the scheme rules which allowed for forfeiture of benefits which were unclaimed for more than six years.  He concluded that only those arrears in respect of the period six years prior to the claim were payable. The rules also gave the trustee discretion to pay arrears which accrued outside the six year limitation period. However, the judgement did not provide any detail on how that discretion might be exercised. It was also concluded that statutory limitation periods would not apply to any claim.

Finally, Morgan J considered whether interest was payable on arrears. He concluded that simple, not compound interest at 1% above base rate should be applied.

Next Steps

What is not known at this stage is whether the case will go to appeal on any of the points.  Additionally, with the UK’s departure from the EU becoming ever closer, it is not known whether the government will depart from equality legislation, potentially limiting the impact of the decision. While this feels unlikely, it should not be ruled out.

The DWP is expected to issue guidance for schemes. Trustees and employers should speak to their advisers, both legal and actuarial to consider next steps.  In the short-term, trustees may have to think about issues such as transfer-out requests which they receive. In the long-term, it may be that an equalisation exercise followed by GMP conversion provides the neatest solution to the GMP issue.