High Court ruling on GMPs
- Court ruling about pensions equalisation could take years and cost billions to implement.
- Equal pensions are important but complexity of UK rules and poor data records will mean difficulties for pension schemes.
- GMP pension problems highlight how vital it is to have accurate pension records – trustees and Regulators must demand auto-enrolment scheme data are checked and corrected.
A High Court ruling today about pensions could have enormous ramifications for most final salary-type pension schemes. As with all things related to pensions, the details are horrendously complicated, but the case revolves around an issue that is unique to the UK – Guaranteed Minimum Pensions (GMPs).
GMPs were introduced in 1978 so that employers and their staff could pay lower National Insurance if they replaced some of the State Pension: Schemes could ‘contract out’ of the State Earnings Related Pension Scheme (SERPS) as long as they offered to replace this part of the State Pension with benefits at least as good as a stated minimum level. The employers and members all paid lower National Insurance and almost all final salary schemes decided to contract out.
Pension schemes used to have different pension ages for men and women: At that time, men and women’s state pension ages were different and most company schemes followed the same practice, with women able to receive their company pension five years before men. However, in 1990, Mr. Barber won a Court Case in which he claimed this was discriminatory and that company schemes should have the same pension age for both men and women. The ECJ ruled that pensions are deferred pay and therefore men and women must be treated equally.
1990 ECJ ruling led to schemes equalising pension ages: After this ‘Barber ruling’ by the European Court of Justice, pension schemes changed their rules so that the pension ages for both men and women were equalised, usually at age 65. However, the rules governing GMPs were set out in legislation and as the State Pension ages were still different, the equalisation did not apply to the way the GMPs were calculated.
GMP rules are so complex, most schemes have not equalised: There has been ongoing uncertainty about how the equalisation should be carried out, so trustees were concerned that they might equalise now but then have to do it again if they used the wrong method. The costs, uncertainty and complexity of the calculation have resulted in most trustees leaving the issue unaddressed.
Lloyds Pension Scheme members took a sex discrimination case to the High Court: The case was brought by three female members of the Lloyds Banking Group scheme who claimed sex discrimination because their GMPs were being increased at a lower rate than male members of the same age. GMPs have to be increased each year, as set out in the Government’s rules, but the rate of revaluation depends on the year in which each member reached pension age. The women’s GMP started earlier than men’s and the rules relating to later years allow men’s GMPs to be increased at higher rates.
Today’s legal ruling has provided some clarity: The High Court has ruled that the GMPs do indeed have to be equalised. That the equalisation must be backdated and that any of three methods can be used, which gives trustees a choice over how to comply. However, there are two major problems. Firstly, data records are often incomplete and inaccurate. Secondly, the actual calculations are so complicated that many actuaries have suggested it is an almost impossible exercise to get right.
The ramifications of the judgement will be potentially enormous due to GMP data errors: Many pension schemes will have to pay significant extra sums in administration to ensure their GMP benefits are correct. Contracting-out ended in 2016 and all schemes have been forced to reconcile their GMP records with the Inland Revenue, to ensure they are correct. Trustees have until December 2018 to do this, but it has been very time-consuming and costly – and is not yet completed. Many errors have been uncovered. Data errors compound over time and, after so many years, original information has been lost. The fact that, even though the Barber ruling occurred in 1990, most schemes have still not been able to equalise all their benefits, highlights the complexity and difficulties of the process.
Auto-enrolment pension records are already wrong – they need to be corrected urgently: Correcting errors in pension data is much easier when they are spotted quickly. GMP records were never properly reconciled to ensure they were correct at the time. This highlights the importance of ensuring that modern pensions are required to check the accuracy of their contribution records regularly. Currently the Pensions Regulator does not ensure that auto-enrolment pension schemes are regularly checking their contributions are correct. It is vital that all trustees and employers, as well as pension scheme managers, are required to prove they have checked contributions for errors and corrected any problems.
DWP will have to issue guidance and there could be legal appeals so the matter is not necessarily over: Trustees will still need to know how they can comply with this new ruling, but there remains the possibility of an appeal being brought. So the whole issue is likely to rumble on and there will be ongoing costs for schemes as they await finality.
In reality, most members will see very little change in their pension payments: The impact on individual members is unlikely to be large. After all the calculations are done, and the whole costly and complicated exercise is completed, most members will see little or no change as a result of equalisation. However, as a whole these pension schemes may have to spend billions in both checking their GMPs and increasing pensions, as well as paying arrears. This could prove damaging to pension schemes which are in a parlous financial position and I hope that the DWP might be able to offer help to ensure this issue does not lead to more schemes being forced into the PPF.