The complex issue of how to deal with inequalities in the guaranteed minimum pension (GMP) payable by formerly contracted out pension schemes has resurfaced.
There has been much discussion on the methods which could be used to achieve equality but no definitive conclusion has been reached.
Two consultations are underway on the question of addressing GMP inequality. One relates to private sector pension schemes, the other to public sector schemes. This post focuses on the private sector consultation.
What is a GMP?
A defined benefit scheme that contracted out of the state earnings related pension scheme before 6 April 1997 was obliged to pay a GMP to members. A member’s GMP is the minimum amount to which he is entitled under the scheme, based on the amount he would have received under the additional state pension.
Where is the inequality?
The GMP is payable from age 60 for women and 65 for men; this mirrors the unequal state pension ages. In addition, there is different legislative treatment of the GMP for men and women in relation to accrual rates, rates of revaluation and indexation. This leads to an inherent inequality within formerly contracted out pension schemes and can mean that the level of pension received from a scheme can be greater for one member than another of the opposite sex, even though they may have an identical work history.
Since the decision of the European Court in the Barber case on 17 May 1990, occupational pension schemes have been required to provide equal benefits to men and women. However, many schemes have not reached a decision on how to address GMP inequality. This is in part because discrimination legislation requires a claimant to produce an identifiable comparator in relation to whom they have been treated less favourably. This is difficult for individual members to do. Two members, one male and the other female, are extremely unlikely to have identical pensionable service and salary history. As such, finding an individual member comparator of the opposite sex is very difficult. In addition, a clear method for equalising GMPs has not been agreed upon despite the passing of many years.
In January 2010 the Department for Work and Pensions (DWP) concluded that GMPs should be equalised regardless of whether or not a comparator could be identified. Yet no conclusions on the method for doing so were forthcoming.
Initial steps towards equality
In January 2012 the DWP consulted on a proposed methodology for addressing GMP inequality. The method required schemes to compare, year by year, the position of a male and female member and pay the better of the two benefits. This method was widely criticised, not only for being administratively expensive, but also because it would result in both men and women receiving pensions that would be higher than they would otherwise receive. GMPs would therefore not be equalised but enhanced.
There followed a long period of near silence. The pensions industry believed that GMP equalisation had disappeared from the agenda. In the wake of the Brexit vote, surely the Government would leave by the wayside a proposition which derives from Europe and is likely to increase costs for UK business without resulting in significant benefit for members?
Where are we now?
Rather surprisingly, at the end of November the DWP issued a consultation paper to address different aspects of the current contracting out regime. The paper includes another potential method for equalising the GMP.
The proposed method involves a one-off calculation and actuarial comparison of the benefits a man and woman would have with the greater of the two converted into an ordinary scheme benefit (the power to convert in this way already exists in legislation).
The calculation involves comparing the future expected cash flows for men and woman in the period 17 May 1990 to 5 April 1997 (from the date of the Barber decision to the date on which GMP ceased accruing in pension schemes). If the opposite sex comparator has the greater discounted value of expected cash flow, then that greater value is provided as the converted benefit.
Should schemes be equalising GMP now?
The proposed method is currently under consultation so the definitive position will not be known until at least 2017. It looks likely that the method will represent a suggested approach, should schemes wish to equalise GMP, rather than a legal requirement. Without an element of compulsion, schemes will continue to face uncertainty on whether or not to equalise their GMPs. Schemes that wish to wind up will continue to require legal advice on how to proceed and to what extent to protect themselves against a possible future decision to legislate on this issue and require GMPs to be equalised.