Anyone involved with defined benefit pension schemes will be aware that guaranteed minimum pensions (GMPs) continue to cause headaches 24 years after they stopped accruing.
The issue affects salary-related occupational schemes that were contracted out of the State Earnings Related Pension Scheme (SERPS) between 1990 and its abolition in 1997 (most schemes did). In the latest development, the Pensions Administration Standards Association (PASA) has published guidance designed to help schemes take yet more corrective action, this time on past transfers.
Since the first Lloyds court ruling in 2018, the pensions industry has been struggling with how to compensate those who are still members. People who transferred out may have left the scheme anything up to 30 years ago, so you can multiply the practical problems for them. There may be a record of the amount transferred, and the scheme or personal pension it was paid to, but there is often little data about the underlying pension rights or how they were valued. Compensation only applies to the benefit earned in the ‘equality period’ of 1990-97 – so service dates are needed.
Why are GMPs such an intractable problem?
GMPs discriminate against men. Statute required them to reflect the SERPS pension they contracted out of. The statutory GMP is what it is, but pensions are pay and the overall pension has to be the higher of what would be paid to a man and a woman. It sounds reasonable but there are a number of tricky issues:
- It’s not obvious whether a person has been disadvantaged other than by a rolling year by year comparison.
- The female GMP may be bigger or smaller than the male GMP depending on the facts and that can change during retirement.
- A bigger GMP can result in a smaller overall pension. Don’t ask.
If a person transfers out:
- You can’t do a rolling comparison – they are cashing in their pension for a one-off capital value.
- Transfer calculations have been done on a sex-specific basis (women having longer life expectancy).
- When you net off the expected adjustments over the course of retirement, even if there is a shortfall, the amount is often tiny. But you don’t know until you’ve done the calculations.
And if you want to top up a past transfer:
- They may have transferred out of the receiving scheme or died.
The scheme may no longer exist, and if it does it won’t tell you anything without the ex-member’s authority.
- You and the ex-member have no reason to have kept in touch.
- The receiving scheme may refuse a top up payment.
- But some may want it to offset the cost of equalising the transfer in benefit (the law is unclear on whether they can pocket it).
So what are schemes to do?
The PASA GMP Equalisation Working Group has updated its guidance on transfers to explain the difficulties and the issues schemes and their advisers should take into account. Sadly, it can’t offer any simple solutions, rightly emphasising the need for legal advice. PASA warned that a number of uncertainties remain that may never be settled by the courts.
Ideally schemes need a way to deliver fair compensation to the ex-member in a cost-effective manner. Unfortunately, the nature of the paying scheme’s obligation is unclear, as is the nature of any claim the receiving arrangement may have.
The top-up is not a benefit, so tricky to validly communicate, and it’s technically due to a third party not to the member. Getting a neat and tidy discharge is going to be a challenge.
It will be important for trustees to show they have engaged with the issues in good faith and done their best to resolve them. Trustees are not required to do the impossible. Courts look for a rational and proportionate response to administrative difficulties. Few schemes have so far taken any action, but those that are on the verge of completing winding up are going to have to find solutions fast.
Anna Rogers is a senior partner at Arc Pensions Law