UK: How GMP Equalisation Will Affect You

Last Updated: 12 December 2016
Article by Christopher Stiles

Just when schemes and employers might have thought they were safe from any more dramatic developments in 2016, we have now seen the return of guaranteed minimum pension (GMP) equalisation, in the form of another Government consultation on the topic.

Key points

  1. A clear requirement under UK law to equalise GMPs? Most schemes recognise that they will need to "equalise" GMPs eventually, i.e. to address the inequality in the design of this benefit between men and women, but their current approach is to do nothing until the scheme winds up or until legislation is forthcoming. That will cease to be possible if the Government legislates such that it will be a clear requirement of UK law for pension schemes to "equalise" GMPs. That has still not happened, but it is clearly a point to which the Government intends to return, and it could do so as early as 2017. 
  2. New method of equalisation proposed The Government has now published a draft method for how to go about equalisation. This method is considerably more in line with what the pensions industry wanted than the method that the Government previously consulted on in 2012 and then dropped. However, the Government does not endorse it as legally valid, and other methods are possible, so schemes will need bespoke advice before adopting it.
  3. Consultation response Employers and schemes may wish to respond to this consultation, either directly or by passing comments to pensions advisers who can reflect them in their own responses. The consultation closes on 15 January 2017.

Background

Guaranteed minimum pensions (GMPs) accrued in occupational pension schemes that contracted out of the State Earnings Related Pension Scheme (SERPS) between 1978 and 1997. Their basic aim was to give members a guaranteed minimum pension from the contracted-out occupational scheme which is broadly equivalent to the pension they had given up in SERPS.

The problem is that SERPS, and therefore also GMPs, discriminated between the sexes. Because state pension age for women was 60, women had fewer years in which to accrue a full pension, and were given a higher accrual rate to make up for that. Also, they could access their GMP five years earlier than men.

For SERPS, the inequality was not an issue, as it was a state benefit. Pensions from occupational pension schemes, however, count as "pay", i.e. remuneration for work, as was established by the Barber case back in 1990. It is a fundamental principle of EU law that there should be equal pay for equal work between men and women, and that is the rationale for why GMPs need to be equalised.

If the GMP were a standalone benefit, equalising it would not be so problematic. Much of the complexity derives from its interaction with the benefits of the occupational pension scheme. It acts sometimes as an underpin, and sometimes as a separate tranche of benefit, depending on the member's employment status and age from time to time.

This complexity has made the question of how to equalise GMPs notoriously difficult, and schemes generally do not take the risk of attempting it, until such time as they are wound up.

The 2012 consultation

EU law, naturally, contains nothing on GMPs specifically, but it does have much on the principle of equal pay for equal work. The Government's understanding of EU law is that it requires GMPs to be equalised, and that this applies even where there is no "comparator", i.e. no person of the opposite sex in the same scheme relative to whom an individual has been disadvantaged.

Accordingly, the Government published draft regulations in 2012 to address this issue. If they had been passed, it would have been a clear requirement under UK law to equalise GMPs. As things stand, without these regulations, it is just about possible to argue that, in the absence of a test case, it is not necessary to do it in order to comply with EU law, although we doubt the Court of Justice of the European Union (CJEU) would sympathise with such arguments.

To accompany the regulations, the Government published a suggested method for how to go about equalisation. This was met with widespread criticism that it was too generous and would be excessively costly to administer. The principle on which it operated was that when a pension came into payment, and every time it was increased thereafter, a comparison should be carried out against what it would have been had the member been of the opposite sex, and the higher of the two should be paid.

That method has perverse results. It is possible, and indeed quite common, for the sex that is disadvantaged by the inequality in the GMP design to change over time. Therefore, following this method, a man and a woman with identical service and salary history might both get an increase in their benefits as a result of equalising in this way. That surely goes beyond what is meant by "equalisation", which should simply be the uplifting of the benefits of the disadvantaged sex to those of the advantaged sex.

What has happened now?

The Government presumably still intends to make it explicit in UK law that GMPs need to be equalised (something which the Government believes, probably rightly, is already an implicit requirement of EU law). The current consultation gives away nothing on the timing of that, but confirms that the Government will look at the matter again.

The point of the current consultation is to set out a different method for carrying out equalisation to that which was proposed in 2012. The new method involves a one-off actuarial calculation of the actuarial value of the member's own pension, and what their pension would have been had they been of the opposite sex. If the latter is higher, that excess is used to buy the member a more generous pension.

Whichever is higher, the GMP is then converted into a normal scheme benefit, using the existing GMP conversion legislation, but with some technical amendments so that it works better for this purpose. The ability to convert GMPs into normal scheme benefits has been on the statute books since 2009, but rarely used owing to the uncertainties over GMP equalisation.

Many in the pensions industry had been lobbying for this sort of approach to GMP equalisation, and the Government's adoption of it will be welcomed.

As things stand, the proposed method is out to consultation, so the definitive position will not be known until 2017.

Will schemes be able to rely on the Government's method?

In the consultation document, the Government is at pains to stress that the proposed method does not constitute legal advice that is sound. The CJEU's views on how, and whether, to equalise GMPs remain unknown.

Schemes cannot therefore assume that adopting the Government's method is safe. They will need bespoke advice from their legal and actuarial advisers on any GMP equalisation exercise. The consultation allows the possibility that schemes may use other methods to equalise GMPs.

Does EU law still matter?

Despite the EU referendum result, EU law continues to apply in the UK while the European Communities Act remains in force, and nobody knows when or how that may cease to be the case.

Successive governments have been content to kick GMP equalisation into the long grass for the 26 years since the Barber judgment, so one has to wonder why they could not have left it there a little longer, in the hope of keeping it there until such time as the EU dimension maybe ceased to be an issue. If the UK does cease to be subject to EU law, that would remove the element of uncertainty and enable parliament to legislate, if it so chose, to exclude GMPs from the principle of equal treatment (justifying such a move, perhaps, on the grounds that they simply reflect the inequality in SERPS).

However, the Government is clearly not adopting that approach, but is moving ahead with GMP equalisation. Even if it were not, a relevant case is currently going through the courts, with a decision expected in 2017, and so the issue was likely to have been forced onto schemes' attention in 2017 either way. So in short, schemes and employers need to be prepared for this.

What should schemes do now?

We continue to take the view that for most schemes, it is acceptable to delay GMP equalisation a little longer to see what legislation the Government actually puts forward, following the current consultation. Schemes that are in wind-up do not have that luxury as they will need to equalise their GMPs before they can complete the wind-up.

All schemes and employers with GMPs should discuss the potential effect of the Government's thinking with their legal and actuarial advisers. Many advisers, ourselves included, will be responding to the consultation, and schemes and employers may wish either to respond also or to feed thoughts into their advisers to take up with Government on their behalf.

We will also continue to actively engage with Government via the industry bodies of which we are members (such as the Association of Pension Lawyers and Society of Pension Professionals) to ensure that any legislation is clear and as free as possible from unintended consequences.

If the Government does pass legislation in the manner it originally planned, then schemes will have to get started on GMP equalisation even if they are not winding up. Whilst the Government's new GMP equalisation method is likely to be considerably less expensive than its previous draft method, employers are likely to want to consider the possible effect on the liabilities and to make representations to the Government accordingly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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