Buck Bond Group

Oh! What a tangled web we weave

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By Gary Crockford

The State Pension, payable to those who reached State Pension age (SPA) before 6 April 2016, is divided into two elements.

  • The basic State Pension is a flat rate pension to which individuals accrued entitlement on the basis of their National Insurance (NI) contribution record (i.e. 30 “qualifying years” of NI contributions or credits would provide the full amount).
  • There is also an additional State Pension which was earnings-related and to which individuals qualified on the basis of earnings between prescribed limits during their working life.

Before the Government (in more recent years) began to equalise the entitlement ages for State Pension, males had an SPA of 65 and females of 60. The State Pension system was therefore based on inequality.

The Government’s thought process behind contracting-out is quite simple.  Why don’t we pass the cost of providing the additional State Pension from the taxpayer to pension schemes?  As part of this process defined benefit occupational pension schemes were allowed to contract out of the State Pension: the incentive being employers and members paid lower rates of NI contributions.  In return for this the scheme concerned had from 1978 to promise to pay its members a minimum pension entitlement called a Guaranteed Minimum Pension (GMP) at age 65 for males and 60 for females. The idea at the time was the GMP would, in payment, broadly replace the additional State Pension a member was forgoing. Since April 1997, an alternative mechanism known as the Reference Scheme Test applied and GMPs ceased to accrue.

In May 1990, more than 12 years after the introduction of GMPs, a Mr Barber took his equalisation case to the European Court of Justice (ECJ).  His pension scheme was a contracted-out occupational pension scheme with a five year gap between the normal pension ages of men and women.  The ECJ ruled that from the date of the judgment, pensions constituted deferred pay and unequal retirement ages for men and women was discriminatory.

Traditionally, many pension schemes had not provided equal pension benefits for men and women, and in particular often had a lower pension age for women.  What was known as the Barber judgment heralded a period of change in relation to pension equalisation.

One area which the pensions industry has grappled with, but has continued to fail to properly address, is how do you equalise GMPs?  GMPs were meant to replace the additional State Pension which itself was discriminatory in having unequal retirement ages.  Although there are schemes which have already had to deal with this issue, for example, where they have been wound up, they are largely the exception.  Nearly 28 years after the Barber judgment, no generally recognised “safe” method of equalising GMPs exists. Any move to equalise will have cost implications for trustees and sponsors of affected schemes. It has been estimated that this could be as much as £20m.

The Department for Work & Pensions (DWP) has attempted to provide clarity on more than one occasion. Its latest consultation, in 2016, sought to achieve equal GMP benefits by comparing the benefits a male and female member would receive in relation to the period between 17 May 1990 and 5 April 1997, and using a one-off calculation, converting the higher amount in ordinary scheme benefits by way of GMP conversion. This latest consultation ran until early 2017, but as yet, the government has yet to confirm how this will be taken forward. The option of GMP conversion has been around for some time, but in lieu of any recognised method for GMP equalisation, has not been used too regularly before now.

Any legislative changes to introduce the DWP’s method of GMP equalisation are likely to requirement a new Pensions Act to be passed. No such legislation was announced in last year’s Queen’s Speech, and with Brexit taking up much of the government’s attention, it is looking increasingly unlikely that a solution will be found this side of the UK leaving the EU.

Separately, it is hoped that case law may provide some guidance for trustees and sponsors.  A legal case is being brought by the Lloyds Trade Union, Lloyds Banking Group, and trustees of the Lloyds pension schemes, at the High Court. This case, which is due to be heard this summer, is expected to consider some fundamental questions on the issue of GMP equalisation.