On 26 October 2018 the High Court handed down judgment in a case about guaranteed minimum pension (“GMP”) equalization brought by the Lloyds Banking Group and three of its defined benefit schemes, Lloyds Banking Group Pensions Trustees Limited and Lloyds Bank Plc et al.
The court held that pensions earned between 17 May 1990 and 5 April 1997 must be equalised between men and women for the effect of GMPs.
Under the principle of minimum interference, it also held that this should be done on the most cost effective basis unless the employer agrees otherwise. The judge rejected one proposed method (based on the actuarial value of benefits as a whole) as insufficient.
On 17 May 1990, the European Court of Justice held that pensions had to be paid on equal terms for men and women (the Barber decision). Despite this, legislation continues to provide for GMPs to be paid from 60 for women and from 65 for men with different rates of increase applying above and below those ages.
GMPs were earned by employees contracted-out of the State Earnings Relating Pension Scheme (SERPs) between 6 April 1978 to 5 April 1997. Employers could pay lower National Insurance contributions if their pension scheme provided GMPs on statutory terms, normally as an underpin to a scheme benefit on other terms.
GMP legislation has never been amended and continues to provide unequal retirement ages for men and women.
The court was asked how inequalities caused by the application of statutory GMP provisions should be dealt with:
- Was the Trustee obliged to adjust non-GMP benefits in order that the total benefits received by male and female members with equivalent age, service and earnings histories are equal?
- If the answer to the first question was “yes”, how should that benefit be equalised?
The Secretary of State for Work and Pensions and Her Majesty’s Treasury were also joined as parties.
How can GMPs lead to unequal total pensions between men and women?
A member with a GMP will typically receive a pension payable from a defined normal retirement age, which must be equal for men and women for service from 17 May 1990, and calculated in accordance with scheme rules and which, for women over 60 and for men over 65, must be no less than their GMP calculated in accordance with statutory provisions. Insofar as the pension is greater than the GMP, including the whole pension payable to men before the age of 65, the balance may be referred to as the “Excess”.
Different rules apply to the GMP and to the Excess under scheme rules and legislation for increasing pensions before and after normal retirement age and GMP age. In particular, high rates of pre-retirement increases apply to GMPs (revaluation) so a longer period of pre-retirement increases for men may off-set the benefit of earlier payment of the GMP for women.
Individual calculations are needed to determine whether the terms for a female member or a male member would be more favourable and the outcome is not stable throughout retirement.
The inequality is further compounded by the application of complicated anti-franking provisions.
What did the court decide?
The High Court decided that the Trustee was required to equalise the total pensions payable to members by making adjustments to take into account the inequalities generated by the practical application of GMP revaluation and increase provisions.
How should equalisation be achieved?
The court considered in detail how equalisation should be achieved by considering four methodologies:
- Method A adjusts each aspect of inequality so the higher award was given at each stage where GMP inequalities arose. It equalises benefits but in a way that was much more expensive for the Banks to implement. The judge held that the principle of minimal interference meant the Trustee could not force the Banks to equalise on this basis.
- Method B provides for the higher of unequalised male and female total pension to be paid each year by making year by year calculations of the pension a member would receive under existing provisions and the pension they would have received if they were of the opposite sex. Although a variant of Method B is used for buy-out transactions, it was more expensive to implement than other methods so Bank consent would be required.
- Method C provides for the better of male or female comparator pensions each year, subject to accumulated offsetting. Method C2 allows for interest to the accumulated offset. Method C2, with interest at 1% over base rate from time to time, was the method preferred by the judge because it was the method that achieved equalisation at the lowest cost to the Banks.
- Method D1, proposed by the Department for Work and Pensions, applies an additional benefit if the actuarial value of unequalised benefits is less than the value of the unequalised benefits of the opposite comparator sex. The judge rejected it on the basis that it breached the principle of minimal interference against the rights of pensioners to receive the payments due under the scheme levelled up to remove the inequality of treatment. Conversely, Method D2 could not be forced on the Banks because it relied on statutory GMP conversion powers which can only be exercised with employer consent.
Should past inequalities resulting from unequal GMP treatment also be equalised?
The court held, and it was accepted by the parties, that the Trustee was required to make back-payments to correct past equalities caused by the GMP regime.
The judge ruled that the back-payments which the Trustee was required to make could only be limited by the governing rules of the Schemes, if they included forfeiture rules in a form permitted by legislation. Having regard to the forfeiture rules in the Schemes, arrears of payment could only be claimed for six years and the Trustee had a discretion to pay any arrears which accrued before the six year period.
The judge held that GMP equalisation claims were not subject to the six year statutory limitation period under the Limitation Act 1980 or the Equality Act 2010 and there was therefore no limit on arrears in the absence of a forfeiture provision in the scheme rules.
What should schemes do?
The decision provides both a requirement to equalise for the effect of GMPs and a preferred methodology in the absence of employer agreement to a more generous methodology.
Schemes now need to agree a methodology and complete the task of re-calculating members’ benefits and paying any arrears, having regard to the scheme’s forfeiture provisions. The additional liabilities will also need to be factored into all valuations.