The latest on reconciling GMPs and how it affects your scheme

GMPs are unequal between men and women for two main reasons:

• Women accrue the same pension as men, but over a shorter period, to allow for different retirement ages.

Thus their accrual rate is higher and they are entitled to receive this pension from age 60, men from age 65. If a member leaves service before their GMP age, revaluation applies from that date until GMP age. 

• Rates of revaluation are different to rates of increase to GMP in payment, and often from the scheme's own revaluation and increase rates applying to the excess over the GMP. 

This will usually have the effect – depending upon movements in inflation – that benefits that are the same for a man and a woman at the date of leaving service will move apart by their retirement age. 

The resulting complexities mean it is not necessarily the case that a man will always receive a lesser GMP than a woman of the same age with the same contracted-out history. 

It is inaccurate to speak of equalising GMPs as such, for that is impossible without a change in the basis for calculation of GMP in section 14 of the 1993 Pension Schemes Act. 

Rather, successive governments have asserted that "to ensure full compliance with European law, trustees should act as if existing domestic legislation requires equalisation in respect of differences resulting from GMPs." 

In other words, in addition to equalisation of overall scheme benefits which accrue from the date of the Barber judgment on May 17 1990, equalisation for the effect of GMPs is required for the period May 17 1990-April 5 1997. 

Government intervention

Early in 2012 the Department for Work and Pensions consulted on one possible way to achieve this. The method would require schemes to calculate both the member's GMP and a notional GMP which would apply to a member of the opposite sex with an identical earnings history, every year up to age 65 and perhaps beyond, and then pay the higher of the two figures.  

Last April the government acknowledged the industry felt this was unduly complex and expensive and did not cover all cases.

Back to the drawing board, then, to see if a solution could be based on the existing GMP conversion legislation, which has itself to date been viewed as prohibitively complicated and expensive to implement.  

Other suggestions focused on the desirability of legislative change, including:  

• removing anti-franking;

• making GMP gender-neutral;

• allowing trustees to set the date it becomes payable;

• abolishing survivor benefits;

• the government prescribing an actuarial basis for conversion.  

Methods for equalising pensions were also suggested, such as raising the value of the benefits with the lower actuarial value to that of the higher value; requiring a one-off calculation, not a year-on-year method and allowing the member to select being treated as a man or woman at the point the GMP comes into payment. The government is still considering these suggestions. 

No new announcements have been made since last April, apart from Pension Protection Fund guidance, but it cannot be left in the long grass indefinitely, with cessation of contracting-out in April 2016.  

The PPF is ploughing on with equalising its compensation, using an underpin methodology which gives members the higher of the (overall) pensions payable in respect of periods of service from May 17 1990-April 5 1997 for two individuals who are equal in every respect except gender.

The comparison is as at the day before the qualifying insolvency event.  

The problem is easier for the PPF, because it needs only to ensure that benefits revalued up to the assessment date are equalised. Other schemes have to address in addition the effect of post-retirement increases to GMPs.  

This is a conundrum the government seems determined to resolve, in the face of a strong industry consensus that it is unnecessary, unworkable and will inevitably cost vastly more than any net benefit.

Ian Neale is director at Aries Pension & Insurance Systems