GMPs must be equalised and arrears paid, High Court rules

Thousands of defined benefit (DB) schemes will be forced to amend their scheme rules and equalise guaranteed minimum pensions (GMPs) between men and women, the High Court has ruled.

In a landmark decision on Friday (26 October), the court ruled pensions provided to members who had contracted-out of their scheme must be recalculated to ensure payments reflect the equalisation of state pension ages in the 1990s.

However, the court did not set a firm route for the equalisation, noting that a number of methods were available for schemes at large.

For the Lloyds scheme in particular, due to the scheme’s rules, the bank could require the trustees to consider annual increases by reference to both what members would have received if they were of the opposite sex and the accumulated value of the pension paid to date.

The court also ruled arrears must be paid, with no limitation period effective and interest applied at 1% over the Bank of England base rate – and this must be taken into account when calculating the difference between GMPs.

For schemes more generally, the presiding judge, Justice Paul Morgan, said the approach above would suffice for equalisation purposes, with or without accounting for arrears and interest rates.

Alternatively, they could calculate a member’s GMP in the same way but based on an annual payment rather than the accumulated value of the pension paid to date.

Further, the court also approved of a method whereby an actuary would calculate the prospective value of male and female GMPs that would be paid between the calculation date and the members’ estimated death, paying the higher.

The Department for Work and Pensions (DWP) confirmed to RP’s sister publication Professional Pensions that it would issue further guidance on this route – which is its preference but unavailable for the Lloyds schemes – in the near future for schemes that wish to adopt it.

The ruling comes after a two-week hearing in July where Lloyds Banking Group, its DB schemes’ trustees, members, and trade unions each presented different cases over whether GMPs need to be equalised and, if so, how and by whom this is done.

Around 135,000 members of the bank’s schemes are expected to be impacted by the judgment. Members who joined the scheme between 1978 and 1997 and substituted their state pension for a higher private pension were estimated to have a gap of less than £500 throughout their entire retirement, as their GMPs increased at a lower rate.

A Lloyds 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.”

‘Welcome certainty’

The trustees for three of the bank’s DB schemes also welcomed the court’s clarification.

“The law has not been clear about whether GMPs should be equalised, or how it might be done,” they said. “The trustee asked the High Court to clarify the situation.

“The High Court has now made its decision and decided that benefits built up in the schemes between 17 May 1990 and 6 April 1997 should be equalised. We will be working through the details of the court’s decision.”

GMPs have been a headache for the industry after the infamous Barber judgment in 1990 said normal retirement ages in occupational pension schemes must be the same for men and women, impacting how GMPs were calculated.

Pinsent Masons partner Stephen Scholefield said, however, that trustees and sponsors may still scratch their heads over the methodology required.

“The court has decided that the inequality caused by GMPs must be addressed by trustees,” he said. “While this brings welcome certainty to this long-running issue, the methodology the court has approved is more complicated than many hoped for.

“Trustees will need to think carefully about how to start to address this issue in their schemes, including correcting past underpayments. Given the complexity, careful planning and good project management will be essential.”

‘Multi-billion pound windfall’

The judgment is likely to add around £100m of liabilities to Lloyds’ schemes, but Royal London director of policy Sir Steve Webb said DB schemes more generally could see this amount to billions of pounds.

“Schemes will need urgent help from the government and regulators to know the best way to respond to this judgment,” he said.

“Members of company schemes could collectively receive a multi-billion pound windfall, but the complexity of making the necessary calculations means that members will not be receiving cheques any time soon.”

The immediate impact of the judgment will see trustees needing to consider the pensions payable to members but other areas of pension scheme funding and payments will be affected.

Linklaters managing associate Sarah Opie said: “While the primary impact will be on the pensions payable to scheme members, trustees are also going to need to consider whether they need to take any action on things like past transfers out and also buy-in policies they already have in place.

“And, immediate action that trustees will need to think about is whether they should be communicating with members, particularly where members have submitted transfer-out requests which haven’t yet been implemented.”