- In a landmark judgment on the complex question of “GMP equalisation”, in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank PLC and others, the High Court confirmed that trustees of formerly contracted out defined benefit pension schemes have to amend scheme rules to equalise for the effect of unequal guaranteed minimum pensions (GMPs). The court also provided some guidance on the method to be used to equalise GMPs.
- Although pension schemes have had to provide equal scheme benefits to male and female members for benefits built up since May 1990, most schemes have not equalised for the effect of unequal GMPs. The pensions industry has grappled with the question of whether equalisation is needed, and the method that should be used, but without any consensus until now.
- This judgment is expected to cost the bank between £100m and £500m to pay higher pensions to affected members. It could have significant cost implications for many pension scheme trustees and sponsoring employers.
- Employers and trustees of defined benefit pension schemes will need to seek advice on the implications of this judgment on their scheme, for example, in relation to transfer requests, as most schemes are unlikely to have equalised for the effect of GMPs.
- Employers will need to consider the cost of equalising benefits as the current funding position of most schemes is unlikely to include reserves for the cost of equalising GMPs.
- Suggested actions for employers and trustees to deal with the impact of the judgment are set out in this alert.
GMPs were introduced in April 1978 and enabled schemes to contract out of the additional state pension (known as the State Earnings Related Pension Scheme or “SERPS”) by providing a minimum amount of pension, the “guaranteed minimum pension” (GMP), broadly equal to the pension that would have been provided by SERPS. Many schemes will have members with GMP benefits up to 5 April 1997 when the GMP rules were abolished for future service.
Under legislation, GMPs are determined on an unequal basis because a female member’s GMP accrues at a greater rate than that of a male member due to the fact that they are payable by reference to a member’s state pension age, which was 60 for female members and 65 for male member’s was 65. Thus a female member’s overall GMP will be greater than the GMP of a male member with identical work history. There are also other factors (unrelated to a member’s sex) that affect the calculation of a GMP for a particular member, including how GMPs are revalued before payment and how they are increased after payment.