The question of whether (and, if so, how) schemes need to equalise for GMPs has created significant uncertainty for trustees and employers. The High Court has today handed down its judgment in an important case (Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank PLC and others) which provides at least some of the answers. In a nutshell, the Court has decided that:
- trustees are under a duty to equalise for GMPs;
- a number of methods of equalising for GMPs are lawful in principle but, importantly, the employer is entitled to say that the trustees must adopt method C (see below for details) – this is the least expensive option for employers, but may be complicated to administer;
- trustees are obliged to make back-payments to members – potentially going back to 17 May 1990, although this will depend on the rules of the relevant scheme (in the Lloyds case, most members are entitled to arrears only for the period of six years before their claim); and
- simple (as opposed to compound) interest on the back-payments should be paid at 1% above base rate.
What are the methods for GMP equalisation?
The methods considered by the Court are summarised below. The Court concluded the trustees are not entitled to adopt method A, but said that the other methods are lawful in principle. The costs refer to the cost implications in the Lloyds case – the costs for other schemes may be significantly different and will require scheme-by-scheme analysis.
- Method A: Equalise each unequal aspect separately. Cost: £300 million
- Method B: Higher of unequalised male and analogous female benefit paid each year. Cost: £135 million
- Method C: Provide better of male or female comparator pensions each year, subject to accumulated offsetting. Aims to address some of the perceived drawbacks of method B. Cost: £100 million
- Method D: Complete one-off actuarial equivalence valuation and then convert GMP to non-GMP benefits. Cost: £100 million
What happens next?
The Court didn’t make any decision in relation to:
- the question of whether a de minimis approach could be adopted (for example, in cases where the estimated cost of calculating and implementing the equalisation method is greater than the additional benefits to which the members would be entitled); or
- whether the obligation to equalise for GMPs extends to benefits which have been transferred-out (although the parties agreed that it does extend to benefits transferred-in).
It is possible that the parties will seek a further ruling on these issues. It is also possible that the decision will be appealed. We should know more in the next few weeks and we will keep you updated.
Is any action required?
The decision provides some of the answers to the long-running issue of GMP equalisation, but we recommend that trustees wait to see what happens next before taking any immediate action to implement the decision. The area of most immediate practical action is likely to be dealing with transfer-out requests. Trustees may want to communicate with members about the decision, particularly where members have submitted transfer-out requests which have not yet been implemented. Trustees may also want to start thinking about the implications for any buy-in or buy-out they have concluded or are in the process of negotiating.