Two UK defined benefit schemes operated by technology company Smiths Group have said they will implement guaranteed minimum pension equalisation but need further clarification from the Department for Work and Pensions to do so.
The problem of equalising GMPs dates back to an EU court decision in 1990, but debate over methodologies has stifled any widespread response from UK schemes.
We are working with the pensions industry to create a workable solution and we will publish our proposal in due course
DWP spokesperson
Experts said trustees should keep a close eye on developments in the space, and questioned the suggestion that the UK’s pending exit from the EU could remove the impetus for equalisation.
Both the Smiths Industries Pension Scheme and the TI Group Pension Scheme are targeting self-sufficiency funding levels and have begun to derisk after a substantial employer contribution last year pushed both into surplus.
Smiths Group chief financial officer Chris O’Shea said: “The trustees and company have worked closely to agree our investment strategy, focused on derisking the pension schemes in a cost-effective manner.”
A spokesperson added that Smiths will consider further buy-ins provided pricing is attractive, having already bought in tranches of the TI scheme between 2008 and 2013.
The schemes will also implement GMP equalisation, according to Smiths Group’s annual results released last week.
“SIPS will implement guaranteed minimum pensions equalisation in respect of members contracted out of the State Earnings Related Pension Scheme prior to 6 April 1997, once the government has completed its consultations and confirmed an approach.”
The report continued: “It is not yet possible to reliably quantify the impact of this adjustment.”
A long wait for guidance
Between 1978 and 1997, employers contracting out of the state second pension had to provide their staff with a GMP as a replacement, payable to men at age 65 and to women (with a higher accrual rate) at 60.
But the European Court of Justice’s 1990 ‘Barber’ ruling found that as pensions were a form of deferred pay, benefits must be uniform between men and women, landing schemes and government with the challenge of equalising benefits paid in the ‘Barber window’.
The Department for Work and Pensions proposed a methodology for equalisation in 2012, but when consultation responses criticised it as overly expensive, it decided to rethink its approach.
“The DWP has been thinking about it for quite a long time and they have talked about doing something about it, but as far as I know that hasn’t actually happened,” said Peter Thompson, trustee executive at Bestrustees.
A DWP spokesperson said: “Equalising the GMP is a complex and technical issue, but something we must deliver to ensure that a person’s pension income is not unfairly determined by their gender. We are working with the pensions industry to create a workable solution and we will publish our proposal in due course.”
The lack of clarification from government has limited scheme action on GMPs to a watching brief in most situations.
GMP equalisation can add between 1 per cent and 3 per cent to scheme liabilities, and the cost of recovery if a scheme chooses the wrong methodology could be significant.
“The exception to that is if [schemes] have been approaching buyout or if they are going into the Pension Protection Fund,” said Sally Minchella, senior consultant at Willis Towers Watson.
According to Thompson, schemes may choose to transfer the risk of incorrect equalisation to an insurer at buyout, but pay a premium to do so.
A Brexit sidestep?
With Prime Minister Theresa May’s announcement of a ‘Great Repeal Bill’ last week, some trustees may have hoped Brexit might hand them a ‘get out of jail free’ card on GMP equalisation.
Smiths uses escrow to help slash £250m from scheme deficit
Technology and engineering conglomerate Smiths Group has signed over its £153m escrow account to its scheme in a deal that demonstrates the positive outcomes that can be achieved through trustee and employer collaboration.
But, while agreeing Brexit would add an “additional layer of complexity” to the debate, Baker & McKenzie head of pensions Jeanette Holland said such an escape from equalisation is unlikely.
“Already enshrined into UK law and pensions law in particular is section 62 of the Pensions Act 1995, and that implies already the equal treatment rule into the rules of an occupational pension scheme.”
“It’s the scope and nature of that equal treatment rule that is at question,” she said, adding that clarification would also be needed over whether schemes can equalise GMPs by converting them to benefits on a one-off basis.
