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The Department of Working Pensions (DWP) has issued a consultation on draft regulations to amend the law on equal treatment of men and women in respect of Guaranteed Minimum Pensions (GMP). As part of the consultation the DWP has also set out a possible method for equalising pensions for the effect of GMP. The consultation runs until 12 April 2012.

What is the issue?

In the past it was common for schemes to structure their rules to reflect the State Pension Age (SPA) with normal retirement ages of 60 for women and 65 for men. On 17 May 1990 the European Court of Justice ruled that occupational pensions were deferred pay and as such it was unlawful to discriminate between men and women in this way (better known as the Barber judgment). Subsequent decisions required steps to be taken to introduce equal treatment for pension accrued after the date of the Barber judgment.

The Government reflected these decisions in UK law and there has been a statutory obligation on schemes to implement equal treatment since the Pensions Act 1995 with the obligation currently included in the Equality Act 2010. Most schemes will have taken action to implement equal treatment for main scheme benefits but very few have taken any action in respect of the equal treatment of GMP.

GMP benefits accrued from 6 April 1978 and were abolished on 5 April 1997, although the obligation to provide the accrued benefit remains. The GMP rules specifically provide for GMP to be paid at SPA, and this means that GMP accrues differently for men and women because its calculation is based on the anticipated working life of the employee.

The revaluation (the increase in GMP before retirement of a deferred member) and indexation (the increase in GMP once in payment) that applies to GMP are also often different to those schemes apply to non GMP benefits. Because GMP comes into payment at an earlier age for women, this difference can further compound unequal treatment.

Although GMP is only part of a scheme’s total benefit, these differences give rise to variations in the total amount paid to each sex. They also mean that the level of inequality can change over time, which is likely to lead to a point, possibly some years after retirement, where there is a crossover in which sex has the most favourable benefit.

The legislative changes

The current equal treatment requirements apply only where there is an individual of the opposite sex who is in like work (or work rated as equivalent) who is treated more favourably (the opposite sex comparator). The Government’s proposed changes remove the need for an opposite sex comparator in respect of the equal treatment of GMP.

The Government has reached this position because it considers that inequality in GMP arises from state legislation and that the cases heard by the European Courts of Justice concerning equal treatment, concluding in the decision in Allonby, require this to be addressed and provide a clear statement that no comparator is required in those circumstances. Instead schemes must assume a notional opposite sex comparator in order to work out whether inequality arises as a result of GMP.

The Government’s view that European law requires schemes to take steps to equalise GMP has not been universally accepted and many commentators have called for a ‘test’ case to be bought before the European courts in order to settle the issue. The Government has attempted to tackle this by stating that it considers the decision in Allonby is clear and that in its view a ‘test’ case will take matters no further.

The possible method for equalising pensions for the effect of the GMP

The Government says that it is aware that uncertainty exists over how to equalise GMP. Combine this with the doubts over legal necessity, the practical difficulties in implementing a method and the potential for high administrative costs both at the start of the exercise and thereafter and it is not surprising that most schemes have not taken any action.

In order to address this inactivity the consultation sets out a description of a possible method to equalise for the effects of GMP. In doing so the Government makes clear that this is ‘one possible method of equalising pensions that schemes could choose to use’ and that it places no legal obligation on schemes to use this method. However it does state that ‘schemes would know it had been considered by a wide range of pension professionals’ and this in itself may make it difficult for trustees and employers to choose a different method.

The consultation sets out that the requirement to equalise applies only to benefits that accrue from 17 May 1990 to 5 April 1997. There are two parts to the requirement:

1. The proposed method requires an additional calculation to be made to compare what a member would get under the scheme rules and the relevant legislation if they were treated as being a person of the opposite sex. The member must then be paid the most favourable benefit. The method requires schemes to make this comparison, and to implement the more favourable benefit, each time the pension is calculated and generally this will be annually when increases are applied.

2. Schemes must consider the earliest age at which a pension is payable to a person of the opposite sex. This means that men will be entitled to receive their GMP earlier than age 65 because their notional female comparator is entitled to GMP from age 60 and if it is not put into payment, appropriate adjustments would need to be made.

The consultation includes some illustrative examples to show how the method works.

The proposed method is likely to be expensive in terms of both payments to scheme members and administrative costs. Initial comments on the consultation are critical of this expensive “gold plated” approach and some commentators favour a method that requires only one comparison to be made at the date of retirement, with the focus on achieving equality in the ‘value’ of benefits.

What now?

The consultation is likely to generate some strong responses and until it is complete it is unlikely that schemes will take any action. Even then there may be a number of issues that schemes will need to deal with including: the quality of member data, how to deal with past unequal payments and the effect on schemes that are winding up, to name a few.

We recommend that schemes maintain a watching brief and defer any action until the proposed legislation is finalised and comes into force. Schemes discontinuing will need to address the issue immediately however. We will keep you advised of developments.

For further information on this article please contact Pitmans Pension Team.

David Hosford
Partner
T: +44 (0) 118 957 0363
E: dhosford@pitmans.com

Lee Colgate
Solicitor
T: +44 (0) 207 634 4636
E: lcolgate@pitmans.com