27 October 2018
In what seems like a lifetime ago (and will be for younger readers), in 1990 a European Court of Justice (ECJ) ruling resulted in pension schemes equalising benefits between men and women. However, one unresolved complication was that the majority of UK schemes are obliged to pay Guaranteed Minimum Pensions (GMPs). Under UK law GMPs were required to differ between men and women until they stopped building up in 1997.
Over the years several cases have confirmed that schemes do not need to equalise the GMPs themselves. So what is new now? This landmark Lloyds Bank case began when the Lloyds Pension Trustee agreed with the Bank and a Union to seek clarity on whether the Trustee needed to remove the inequalities that arise in scheme benefits as a result of those unequal GMPs. The hearing took place in July, with the judgment released today.
The High Court’s judgment in the Lloyds Bank case is not a great surprise, confirming that occupational pension schemes need to adjust scheme benefits to remove the inequalities that arise from unequal GMPs. The DWP has been saying since 2010 that removing the inequalities is necessary. The only real surprise is that it has taken this long for the issue to come to court.
Next steps for trustees and sponsors…
Trustees will not relish having to recalculate benefits going back almost 30 years. The judgment does, however, at least give clarity that something needs to be done. The question is what, given the range of methods available.
The most pressing consideration for trustees is likely to be whether to adjust transfer values to reflect the judgment. For employers the immediate question is what impact, if any, the judgment has on P&L and a company’s year-end accounts.
Our checklist for trustees and employers provides a handy summary of tasks to consider in both the short and medium term.
What does the future hold?
I wouldn’t recommend anyone dives straight into adjusting retirement benefits just yet. Having found solutions for the GMP inequalities issue for a large number of pension schemes in buy-out and wind-up situations over the years, LCP has built up a great deal of expertise in this field.
Careful preparation and consideration of the different options is required to establish what is practical and proportionate for your scheme. Several of the methods on the table will involve complex and expensive on-going administration, having to maintain two administration records for each member indefinitely and in some cases also keeping track of all past payments since retirement.
The good news is that the Court has left the door open to the methodology I (and others) have been working on with DWP involving GMP conversion. Using conversion could deliver significant simplification, but to date is untested. The Lloyds judgment has resolved several legal uncertainties in the conversion legislation. It is now essential that DWP and the Treasury remove the remaining practical obstacles to implementation. Without this, trustees could still be keeping dual administration records into the 22nd century!
How we can help
LCP has an experienced team of GMP inequalities experts, having implemented all of the main methods for removing GMP inequalities across a wide range of clients in buy-out and wind-up situations. The methods and techniques we have developed mean we can help trustees and employers adopt a structured approach to ensure work can be completed efficiently and proportionately.