On 26 October, the High Court delivered its landmark decision in the Lloyds Bank case, ruling that Guaranteed Minimum Pensions (GMPs) must be equalised between men and women and that past underpayments must be corrected.
GMPs are payable at state pension age which, throughout the period during which GMPs accrued (6 April 1978 to 5 April 1997), was 65 for men and 60 for women. As a result, GMPs accrue at different rates for men and women and are revalued over different periods. It is this inherent inequality of GMPs that led to their abandonment in 1997.
Whether or not GMPs need to be equalised between male and female members, and more contentiously just what steps are necessary to remove inequality, have been recurring topics since the European Court of Justice’s ruling in Barber in 1990.
In its judgment in the Lloyds Bank case, the High Court held that it is unlawful to pay unequal benefits to men and women and, therefore, trustees are under a duty to equalise for GMPs. However, this duty only applies to GMPs accrued after the Barber judgment in 1990.
The judgment is expected to increase the Lloyds Bank Schemes liabilities by around £100m. Whilst some members of the Schemes may see an increase in the value of their pension, in practice, most will see little change as any increases are likely to be less than £500 in total over their retirement, which could be over 30 years, Lloyds noted. Regardless, the judgment is likely to have wide ranging implications for defined benefit schemes more generally.
In the case, the Court also addressed and narrowed down the methodology to be used to calculate the payments. In summary, the methods which were considered are:-
- Method A – the “element by element” approach. Under this method each aspect of the pension calculation is taken separately and adjusted on an annual basis to remove any inequality. This is the method the Lloyds members were arguing for, however it was held that this method should not be used.
- Method B – the “compare and increase” approach. Under this method, when the pension first comes into payment, the pension payable to a comparable male and female would be calculated. At this point in time, the female’s pension will often be higher as she will have benefitted from a higher revaluation rate to her GMP during deferment. The higher pension will be paid to both sexes. Then each year, there will be a calculation of and comparison between the member’s actual benefits and what he/she would have received if they were of the opposite sex. The greater of the two calculations would then form the basis of the payment to the member. Unlike Method A, this is not an element by element approach but involves a single calculation on the male and female basis.
- Method C – the “equal payments” approach. This uses the same initial calculation as Method B but is designed, in effect, to equalise cumulative pension paid so as to avoid overcompensating members. So, if the annual benefit comparison reveals that the previously advantaged sex has now become the disadvantaged one (i.e. the two sexes have traded places), instead of applying an automatic increase to the now disadvantaged sex, the lower of the two calculations is paid “until such time as the accumulated excess prior to the switch equals the accumulated loss after the switch”.
- Method D – the “actuarial equivalence” approach. This would involve a one-off actuarial calculation of the future rights to benefits of male and female comparators, with any difference paid to the disadvantaged members as additional pension. As a variation on this (referred to as “Method D2” in the judgment) would involve using the GMP conversion legislation and providing “a pension which converts GMP structures into an alternative format (for example in line with non-GMP benefits) and is of equal actuarial value to the larger of the compared values”.
When considering which method should be used in this instance, the Judge considered that the method which involved the “least interference” should be chosen, which in this case would be Method B or Method C. Method D is the method which is currently used most frequently on scheme wind-ups as it provides a one-off calculation. The Judge held that Method D2 is, in principle, a lawful method.
Whilst it is possible that they may appeal the decision, Lloyds have welcomed the decision made by the Court and the clarity that it brings. They have commented that they are working through the details of the judgment in order to implement the Court’s decision.
If Lloyds do wish to proceed to appeal, they have 21 days from 26 October to lodge this.
The DWP has stated that it will be issuing Guidance in the light of this ruling.