Defined benefit schemes must equalise guaranteed minimum pensions between men and women, the High Court has ruled, in a decision that could cost FTSE 100 companies alone up to £15bn.
The court confirmed on Friday that schemes will have to address GMP inequality back to 1990, the date when an EU court decided that men and women should receive equal pensions.
The decision specifically addressed the case of three female members of the Lloyds Banking Group scheme, who argued that sex discrimination had taken place on the basis that their pensions had increased at a lower rate than those of men.
GMPs are a legacy of the system of contracting out of the state earnings-related pension scheme. Employers paid GMPs to employees who were contracted out, and both paid lower national insurance contributions.
GMPs were previously measured on the assumption that women retired before men, and so accrued their pension at a different rate, leading to potential inequalities.
Contracting out ended in April this year with the rollout of the new flat rate state pension.
People who have transferred will have signed a discharge so there’s still some uncertainty
Rob Dales, JLT Employee Benefits
The High Court has now ruled that GMPs must be equalised, and that beneficiaries are entitled to receive due arrears of payment. For Lloyds, it is thought these changes will cost between £100m and £150m.
A report by consultancy LCP earlier this month predicted that GMP equalisation could hit FTSE 100 profits by up to £15bn.
A Lloyds Banking Group spokesperson said: “The hearing focused on what is a complex and longstanding industry-wide issue. The group welcomes the decision made by the court and the clarity it provides.”
“The group and the pension scheme trustee will be working through the details in order to implement the court’s decision.”
Verdict may go unchallenged
Crucially, the court has not specified exactly how schemes must equalise GMPs. It has allowed schemes the freedom to choose from a range of equalisation methods, which include payment of “the higher of the accumulated pension payable to either an unequalised male or female”.
A handful of methods were not permitted owing to the principle of minimum interference, both from the standpoint of member beneficiaries and the banks.
According to this principle, the courts “can’t force the employer to incur costs [that] the employer isn’t obliged to incur, and equally, they can’t mess around with benefits in a way that the member isn’t actually going to get what the member was written as getting,” according to Alastair Meeks, partner at law firm Pinsent Masons.
The ruling could still be appealed, but Meeks said he “wouldn’t be at all surprised” if the verdict went unchallenged.
“It offers a practical way forward for schemes,” he said.
What about those who have left the scheme?
Experts predict that employers will have to recognise additional liabilities resulting from GMP equalisation in their 2018 end of year accounts.
Rob Dales, director at consultancy JLT Employee Benefits, was disappointed that the court had not come down on the side of one equalisation methodology, but added that the ruling now offers an opportunity for schemes to simplify their benefit structure by converting GMPs to scheme benefits.*
“The complications are gone, the administration and valuations become simpler, and members will have some chance of understanding what their pension actually is,” he said.
In its judgment, the court said that “the period for which beneficiaries are entitled to receive arrears of payments is governed by the rules of the Schemes which deal with the period of time more than six years before a claim for payment of arrears”.
Dales queried whether those who have already transferred out their benefits, or those in receipt of their pensions, would be entitled to these arrears.
“It’s not clear, is it?” he said. “Certainly, people who have transferred will have signed a discharge so there’s still some uncertainty.”
Looking beyond GMPs
Schemes will now be expected to proceed with GMP equalisation. Christopher Stiles, director at law firm Gowling WLG, argued that the court’s flexible approach to equalisation methods had in fact been a helpful recognition of “scheme-specific factors”.
Stiles predicted that the judgment could have consequences that reach beyond the matter of equalising GMPs.
Ford set to offer partial transfers
Ford has agreed to offer members of its defined benefit scheme the right to partially transfer out half of their pension as cash at retirement, allowing former employees greater flexibility in their benefits.
“Potentially, some of the stuff that’s in here is going to be relevant where benefits are underpaid for various reasons, not just the GMP element, and the extent to which back-payments are payable and members are entitled to interest on back-payments as well,” he said.
“It is outrageous that this question has been kicked into the grass for so long,” he added.
*This article has been amended to clarify reporting of a statement by Rob Dales.
