In a landmark ruling the High Court has confirmed that schemes must equalise benefits to address the unequal effect of GMPs. In this insight we look at the Court's decision in Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank PLC and others, a judgment which could answer a question that has been open for nearly 30 years.
What are GMPs?
Schemes which contracted-out of the State Earnings Related Pension Scheme (SERPS) between 6 April 1978 and 5 April 1997 must provide a guaranteed minimum level of benefits to members. This is a guaranteed minimum pension, or GMP.
How can GMPs create unequal benefits?
The starting point is that women are entitled to their GMP at age 60, and men at age 65. This is clearly unequal and had (and still has) a knock-on effect upon:
- the rate at which GMP accrued;
- the way that revaluation applies;
- the way that indexation applies; and
- a member's overall benefit from a scheme that provides GMPs.
What was the High Court asked to decide?
The High Court considered four questions, as follows.
- Do trustees have a duty to equalise for the unequal effect of GMPs?
- If so, what method should they use?
- If it becomes clear that benefits have been underpaid, is there a limit on the number of years that a member can look back to bring a claim against the scheme?
- What should trustees do if members have transferred benefits into or out of the scheme?
What did the High Court decide?
Mr Justice Morgan ruled that:
- trustees have a duty to equalise for the unequal effect of GMPs;
- the duty to equalise applies in relation to GMP accrued between 17 May 1990 and 5 April 1997 (when GMPs stopped accruing);
- more than one method of equalising for the effect of unequal GMPs is in theory possible. Although Mr Justice Morgan reached a decision in relation to the three Lloyds Banking Group schemes involved in the case, other schemes will need to consider which of the methods might be available to them;
- where it becomes clear that benefits have been underpaid, there is no statutory time limit on the number of years over which a member could look back to bring a claim. However, there might be a limitation in the scheme rules (for example, a rule which says that a member cannot claim benefits unpaid for more than 6 years); and
- where arrears are paid, simple interest at 1% above base rate should be applied.
Why is this decision so important?
The question of whether or not it is necessary to equalise benefits for the unequal effect of GMPs has been alive since the ECJ delivered its judgment in Barber v Guardian Royal Exchange Assurance Group in May 1990. The Barber case established the principle that occupational pensions were 'pay' and that men and women must be treated equally. However, the GMP has its origins in legislation and the government did not take the opportunity to change the legislation post-Barber. For this, and other reasons, the position has not been clear. Subject to a successful appeal, this decision could provide the answer.
How does the decision affect my scheme?
Although the ruling relates to three Lloyds Banking Group pension schemes, it has the potential to impact any scheme which provides GMPs. The trustees of these schemes must now consider what the High Court has said and decide how they are going to respond.
What do I need to do?
At the moment, it is possible there will be an appeal and trustees need to decide what action to take whilst we wait to see if that is the case.
Trustees should also start thinking about what action they will take once this point is clear. The impact of the decision is likely to vary from scheme to scheme and trustees should note that the DWP has said it intends to issue guidance in relation to possible equalisation methodology. It is also possible that there will be further applications to court. For example, an application might be made for guidance on trustee duties where benefits have been transferred out, or on the question of whether it is possible to take no action if the cost of equalising is likely to exceed the benefit to the member.
We will shortly be publishing a checklist of issues that trustees need to consider and suggestion of practical steps trustees should take.