Despite strong objections from the pensions industry, the Government has made clear in an interim response to its consultation on Guaranteed Minimum Pension (GMP) equalisation that it is “in no doubt” about the need for UK occupational pension schemes to equalise GMPs for men and women under EU law. As such, it intends to press ahead with its plans to amend the UK’s equality legislation to require schemes to do so. However, these amendments will be delayed while the Government considers providing statutory guidance on GMP conversion, which could offer schemes a simpler and less expensive way of achieving equalisation.
GMPs and equalisation: a brief reminder
GMPs are the element which must be provided by defined benefit schemes which were contracted-out of SERPS between 1978 and 1997. It has long been unclear whether, as a matter of European law, GMPs should be equalised and, if so, how. As a result of this legal uncertainty, most schemes have chosen not to equalise GMPs.
Since the Barber European judgement on 17 May 1990, pension schemes have had to provide benefits on an equal basis for men and women. UK legislation reflects this requirement. However, at present, equalisation is only required where there is an individual of the opposite sex, engaged in comparable work, who has been treated more favourably (usually referred to as a “comparator”). State benefits (such as the SERPS pensions which GMPs are intended to replicate) are exempted by European treaties from these requirements.
On 20 January 2012, the Government began a consultation on draft Regulations designed to amend the Equality Act 2010 and the Pensions Act 2004 (in relation to payments made by the Pension Protection Fund) to reflect the Government’s view of the current legal position. In particular, the Government signalled its intention to amend the legislation so that the requirement to equalise GMPs would not be subject to the requirement that an opposite sex comparator exists – based on the Government’s interpretation of a further European case, Allonby v Accrington & Rossendale College from 2004. By removing the need for a comparator in the way planned the Government would, in effect, be requiring UK pension schemes to equalise GMPs.
In an interim response to its consultation on GMP equalisation, which it published on 8 April 2013, the Government acknowledged that “many respondents voiced strong objections against the requirement to equalise, stating that there was no clear legal requirement to do so”. However, the Government made clear that it remains “in no doubt” about the need for UK schemes to equalise GMPs and therefore it still intends to press ahead with its plans to amend UK legislation to require UK pension schemes to do this.
There is however some respite for schemes. The Government has said that it will not publish a final version of its proposed methodology for achieving equalisation, which it originally published as part of the consultation process. This will be welcomed because the Government’s method was widely seen as a “gold-plated” way of equalising GMPs, which would have added significantly to the costs for affected schemes.
The Government has not said when the legislative changes will be made. However, it indicated that they would be delayed while the Government gives further consideration to providing statutory guidance for schemes on GMP conversion, which could potentially offer schemes a simpler and less expensive way of achieving equalisation.
We are disappointed that the Government is pressing ahead with GMP equalisation on the basis that (along with many others within the industry):
- we consider that there is still real legal uncertainty in EU law about whether GMPs should be equalised and that there are at least two real legal defences to this being required as matters stand. If the Government is right, the requirement to equalise GMPs under EU law already applies – but in the 23 years since the Barber decision the point has never had to be referred to the European Court. If, as is at least arguable, the Government is wrong, then once again it will be needlessly gold-plating EU requirements, and
- we consider that the Government’s argument to do away with the need for comparators is much less persuasive. Again this is a matter that could be left to the European Court to determine rather than risking yet more gold-plating.
Unfortunately, the Government’s decision will result in significant additional red tape and cost for defined benefit plan sponsors and trustees at a time when there are enough other challenges requiring attention and resources.
Having said that, we welcome the Government’s decision to step back from prescribing a “gold-plated” methodology for equalisation. We also welcome the idea of making it possible to use the existing statutory powers to convert GMPs into standard scheme benefits in a way that achieves equalisation simultaneously. So far this process has not gained significant traction, but it does offer the potential for simplifying member benefits into a format that will be easier for members to understand and schemes to deliver and for providing employers with a way to significantly reduce the costs associated with equalising GMPs.