In a landmark decision delivered on 26 October 2018, the High Court ruled that pension scheme trustees are under a duty to equalise benefits for men and women in respect of Guaranteed Minimum Pensions (GMPs). The Court also confirmed that:

  • a number of methods for equalising GMPs are lawful and trustees should not select the most expensive option but should be guided by the principle of ‘minimum interference’ described below
  • employers are permitted to require trustees to apply Method C (which involves providing the better of accumulated male or female benefits each year, which may enable some of the additional benefits provided due to equalisation to be taken into account if the advantaged sex changes over time) as this will be least costly for the employer
  • trustees are obliged to make back-payments to members. No statutory limitation period applies and therefore the time period which back-payments must cover will turn upon the rules of the scheme in question

GMPs: the issue

From 6 April 1978 employers were able to contract out of the second tier of state pension known as ‘SERPS’ such that employees in contracted-out employment did not accrue any second tier pension. Employers and members of such schemes paid lower national insurance contributions and in return the employer was required to provide a pension scheme promising a level of benefits (the GMP) which was broadly equivalent to the second tier pension. Although GMPs ceased to accumulate from 6 April 1997 and contracting-out was abolished on 6 April 2016, accrued GMPs were not altered and therefore many schemes have historic GMP liabilities.

GMPs are inherently unequal due to a number of factors including the differing retirement ages between the sexes (60 for women and 65 for men) and female GMPs accruing at a higher rate.

Since the Barber decision was made in 1990, occupational pension schemes have been under a duty to equalise benefits for male and female members. The question of whether GMPs need to be equalised in line with Barber has been debated for the 28 years since, but until the High Court’s judgment last week the matter remained unresolved. Doubt had persisted due to the relationship between GMPs and the state pension scheme and because exceptions to the usual European equality requirements apply to some state pension arrangements.

The decision

The High Court ruled that trustees are ‘under a duty to amend the Schemes in order to equalise benefits for men and women so as to alter the result which is at present produced in relation to GMPs’. The judge took into account the principle of ’minimum interference’ established in earlier equalisation cases, holding that where equality can be achieved using multiple approaches then trustees should select the option which will cause the least interference to the rights of any party. In considering which of the possible options caused the minimum interference, the judge took account of such factors as the cost to the employer and the effect that the options have on the benefits.

Four methods for equalising GMPs were considered by the Court:

Method A – equalise each unequal aspect of benefits separately

Method B – provide the better of male or female benefits on a year-by-year basis

Method C – as for method B but subject to accumulated offsetting (see below)

Method D – a one-off actuarial equivalence valuation

The Court ruled that Methods A and D could not be used in the present case as they did not satisfy the minimum interference principle. However, the trustees could adopt a variation on Method D if the equalisation was made after a statutory conversion of GMPs into non-GMP benefits.

Method C was the Court’s favoured approach and the least costly option available in the present case. Under this method, the annual pension would ensure that the accumulated pension payable to date is equal to the higher of the pension payable to a male or female member. This method makes a difference as compared to Method B when the sex entitled to the better GMP benefits changes over time (e.g. female to male). Where the advantage switches, Method C enables the additional benefits provided to equalise the benefits of the sex that originally had the lower benefits to effectively be deducted with interest from that sex’s benefits when comparing them with the other (now worse off) sex’s benefits to calculate any compensation required (the deduction cannot be effective below the level of the now worse off sex’s benefits).

Method B was also found to be acceptable, although significantly more expensive than option C.

The judge held that no statutory limitation period applies to member claims for back-payments, however a scheme’s rules may limit the time period permitted for such claims. Scheme rules commonly limit claims to six years’ back-payments. Interest is payable on back-payments at 1% over base rate.

What happens next?

While the High Court’s decision may yet be appealed, it would be prudent for trustees to commence discussions with their scheme advisers on the potential implications of the ruling. In particular, trustees will need to give immediate consideration to their approach for dealing with any pending transfer-out requests from members whose post-equalisation benefits are unconfirmed.

Trustees should also consider seeking actuarial input on the estimated costs of a GMP equalisation exercise and assessing the sufficiency of existing scheme data for this purpose. Further, in anticipation of likely queries from members, it may be sensible for trustees to issue a general communication acknowledging the fact of the Court’s decision and explaining that they are in the process of considering its consequences for the scheme.