Lloyds Bank test case finally grasps the nettle of GMP equalisation
In 1990, in between the release of Nelson Mandela from captivity and the fall of the Berlin Wall, was a development even more dramatic in the world of pensions: the European Court of Justice (ECJ) ruling in the Barber case that pensions were pay and therefore had to be equal between men and women.
It took a series of further cases to clarify various issues, including the carve-out of benefits earned by pre 1990 service. But 27 years later we still have one thorny subject unresolved: the complex issue of whether and how to deal with the inequalities arising from Guaranteed Minimum Pensions (GMPs). The Lloyds Bank case is set to tackle this head on.
GMPs replaced the earnings-related part of the State pension up to 1997 in contracted-out schemes, and the rate of GMP accrual was higher for a woman. But a higher GMP can be disadvantageous, because the excess often carries better pension increases. The comparison changes at different ages and depending on scheme benefit design. So it is not enough simply to move everyone onto the female (or male) basis.
The industry has been hoping that there may be some dispensation for this problem. No-one wants to do more than turns out to be required. Some schemes acted too soon after 1990 and later learned that they only had to equalise for post-1990 accrual.
The Pensions Ombudsman confirmed it is justifiable for schemes to wait until a solution becomes clear (in the 2015 Kenworthy case). In 2001 the Court had overruled the Ombudsman’s decision in the Williamson case that GMPs had to be equalised. The Government stated in 2010 that schemes should equalise overall benefits and members did not need an actual comparator (based on the Allonby case in 2003). A number of DWP consultations have followed.
Schemes that have taken action have generally done so on the basis that the effect of the GMP has to be equalised. The capital value is calculated for the overall male and female versions of a member’s benefit for the 1990-97 period, and if the value for the opposite sex is higher, an uplift is given. In the 2005 case of Degnan v Redcar, the Court of Appeal decided it was right to look at the overall effect of different terms if they essentially formed one financial benefit. This approach would help to overcome the strict wording of section 67 of the Equality Act 2010 which requires each “term” to be equal – the worry being that that means each calculation element of both GMP and excess would have to be equalised, producing a “gold-plated” and unworkable composite benefit to which neither sex was ever entitled.
The Lloyds case
In May 2017, the Lloyds Banking Group Trustee applied for the High Court’s directions on the following questions:
- Is the Trustee obliged to increase benefits in excess of GMP to give equal treatment in the overall pension?
- Is the equal treatment obligation only engaged if the affected member has an actual comparator?
- Is there a single correct method of equalising or a choice of acceptable methods?
- If there is a choice, which one should the Trustee adopt?
The case will not be heard until 2018 and the ruling will be closely scrutinised. It is presented as discrimination against women – the Trade Union says 230,000 women are affected. The amounts involved for Lloyds are large and further appeals might be expected.
The European dimension
EU requirements on equal pay have been written into UK statute, which will not fall away on Brexit. Could the impact of GMPs be carved out of the Equality Act? There may be constraints on what the UK Government can do within UK law. In the recent Brewster case, we saw the Supreme Court upholding rights to pensions as property rights, under the Human Rights Act, though that Act may itself be replaced.
If Lloyds Bank relies on the different treatment of State pensions under EU Directives, as a justification for the inequality, the issue may require a final ruling from the ECJ. It may or may not be feasible to fast track any appeal before Brexit is complete. We do not yet know what kind of transitional arrangements might be in place and whether EU law might have any continuing relevance, specially where the “pay” at issue was earned between 1990 and 1997, during the UK’s membership of the EU.
The clock is now ticking on the GMP issue. It may turn out that no action is required, which would certainly be welcome to an industry straining to cope with current pressures. Though GMP is only an element of the benefit for a maximum seven year period, costs are reportedly estimated at up to £20 billion. The administrative costs alone of benefit correction exercises will be substantial given that this issue has effectively been put on hold for thirty years. Schemes may have to decide how far they should, or even can, go to correct benefits historically, for example where data is lacking, or members have transferred out or died. Trustees can only do what they can do.
With Nelson Mandela and German reunification, hope triumphed in the end. Pension schemes and sponsors with GMPs will continue to hope for the best, but it would be prudent also to plan for the worst.
Anna Rogers, Senior Partner
This article was published in Actuarial Post
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