The court’s ruling in the Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank Plc & Ors case is a significant change for any pension scheme that provides GMPs for members, and employers should understand how these additional pension liabilities will affect them. This includes considering which approach to take and factoring the impact of the decision into their wider business planning.
What is a GMP?
Employers and employees who contracted out of the additional state pension paid lower NI contributions but the pension scheme had to provide a GMP at least equal to the additional state pension. GMPs apply to pensionable service between 17 May 1990 and 6 April 1997.
GMPs are taken at different ages – women at 60 and men at 65. This results in inequality in the GMP value at the point at which benefits are taken.
Any formerly contracted out defined benefit schemes with GMPs and money purchase schemes with a GMP underpin must equalise GMP benefits for men and women.
The Lloyds case looked at four different methods, with variations, to equalise GMPs and decided that the employer could require trustees to adopt method C2 – providing the minimum of what was legally required on the basis of minimum interference by the courts. Method C2 looks at the better of male or female GMP each year (allowing for interest and accumulated pension paid to date) and pays the higher amount to members each year.
If the employer agrees, then method D2 (among others) can be used. Method D2 uses the GMP conversion legislation to convert GMP to non-GMP benefits. We are awaiting guidance from the DWP on whether amendments to the conversion legislation are required following the judgment, together with further information on how employers should go about approaching this.
Many employers are attracted by the one-off conversion of method D2. This method means that GMPs no longer have to be held within a pension scheme and future administration costs are reduced. The interest for method C2 is 1 per cent over base rate. The interest for method D2 is decided by the scheme actuary.
Beneficiaries are entitled to arrears of payments back to 17 May 1990, subject to checking any specific time limit under the scheme's rules.
A key issue remains, which is whether previous transfers out of the scheme have to be revisited. The judgment did not address how to deal with trivial commutation lump sums and serious ill-health lump sums that have been paid out. All of these may result in additional scheme liabilities and a further hearing may clarify this.
What will GMP equalisation cost employers?
GMP equalisation could add 1-4 per cent of liabilities to each pension scheme. The cost is very specific to a scheme's circumstances and membership. The total cost across all pension schemes with GMPs is estimated to be £15-20bn.
If a pension scheme has recently been wound up or the trustees have entered into a buy-in or are in the process of negotiating a buy-in or buyout, they will need to check whether GMP equalisation is dealt with under the agreement. Employers should also check recent corporate transactions to see whether GMP equalisation was included in the indemnities.
Next steps for employers
Employers should wait for the DWP guidance and any further legal appeals before deciding on how to equalise GMP benefits. They will need to work closely with their legal advisers, accountants, scheme actuary and administrator to agree a detailed project plan to deliver GMP equalisation, including member communications.
Sasha Butterworth is partner and head of pensions at UK law firm TLT