Bank faces £150m bill after landmark pensions ruling

Thousands of organisations may have to make payouts to bring gender parity to final salary schemes, experts warn

Lloyds Banking Group may have to pay up to £150m as a result of a High Court ruling that it must equalise its pension payouts between men and women. 

The court ruled the banking group must amend its pension schemes to equalise benefits, after three women brought a case claiming sex discrimination on the grounds their pensions increased at a lower rate than those of their male counterparts. 

The case centres around Guaranteed Minimum Pensions (GMPs) for employees who contracted out of the State Earnings Related Pension (SERPs) scheme in the 1990s. 

When contracting out, an employee and their employer paid a reduced rate of national insurance. But the company had to pay a GMP, which was supposed to be “broadly equivalent” to what the employee would have received from SERPs, for tax purposes. 

Because the retirement age for women is lower than men, this led to them receiving lower GMPs from their employers. But the court has now ruled this amounted to discrimination and has ordered Lloyds to reimburse women at the same rate as their male colleagues. 

The case could have widespread implications for other companies that have final salary pension schemes. The Department of Work and Pensions (DWP) and the Treasury were interested parties in the case because of its implications for the public sector, while the Banking Trade Union (BTU), which brought the case on behalf of Lloyds employees, claimed 5 million members of 6,000 pension schemes could be affected.

Steve Webb, former pensions minister and current director of policy at Royal London, said the verdict is “likely to create a big headache for schemes and employers”. 

“The total bill will run into many billions of pounds, but it is still not entirely clear exactly how schemes should remove inequalities arising from GMPs,” Webb said. “Employers will not know their exact bill until their scheme has decided how to equalise, and that in turn will depend on updated guidance from DWP, as well as on scheme-specific factors.”

He added that, while the Lloyds verdict was helpful, it “still leaves some questions unanswered”. Webb explained the court “left open” different ways in which GMPs could be equalised, and businesses are “now waiting for a steer from DWP” on how to proceed. 

Nathan Long, senior analyst at Hargreaves Lansdown, said the ruling impacts pension benefits “built up in older-style final salary pensions before 1997” as opposed to modern workplace pensions,

“But for the huge number of employers that have legacy final salary pension schemes, this could be a really big deal,” Long added. “Not only will this be an admin headache to ensure the remaining benefits are made equal between men and women, I’d expect to see employers having to pay additional monies into their pension schemes to cover the cost of the additional payouts.”

And Samantha Brown, pensions partner at Herbert Smith Freehills, said the case highlighted the “nightmarish complexity of UK pensions legislation”. 

“It also illustrates the perils faced by employers who, having complied with the UK's legislative requirements to the letter, now face a significant additional liability because that legislation and the corresponding state pension benefits treat males and females differently,” Brown said.

Almost 3,000 members of BTU joined the case against Lloyds, in a class action lawsuit. The union previously estimated the cost to equalise benefits could have been up to £508m

But Justice Morgan narrowed the cost for Lloyds to equalise their benefits to between £100m and £150m. He also ruled Lloyds was “under a duty to amend the schemes in order to equalise benefits for men and women so as to alter the result which is at present produced in relation to GMPs”.

Mark Brown, BTU general secretary, said the ruling “resolves this pension discrimination issue for good”

“[The judgment] will bring equality to millions of women across the country,” Brown said. “It’s simply unacceptable that 48 years since the passing of the Equal Pay Act in 1970 we are still fighting for equal treatment in the workplace.”

A spokesperson for Lloyds said: “The hearing focused on what is a complex and long standing, 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.”