After an extended waiting period, the DWP has published draft guidance to schemes on one possible method of resolving historic pensions inequality caused by Guaranteed Minimum Pensions (GMPs), accompanied by suggested amendments to legislation facilitating the conversion of GMPs to ‘normal’ scheme benefits. The majority of schemes and trustees need not take immediate action to equalise their GMPs, but rather should note the government’s proposed GMP method and await the government’s final guidance and legislation.
Background
Defined benefit pension schemes which contracted out of the State Earnings Related Pension Scheme (SERPS) before 1997 were obliged to pay GMPs to members. It is widely acknowledged that GMPs are by their nature discriminatory, as men and women accrue GMPs at different rates, are entitled to these at different ages and, in many schemes, different increases are applied to GMP than to non-GMP benefits. The 1990 Barber case confirmed that pensions were pay for the purposes of European equality legislation and therefore should be equalised between men and women. The implications of the judgment for GMPs were the subject of much debate and in 2010 the UK government confirmed its view that European law requires GMPs to be equalised between men and women.
However, most schemes have hesitated to equalise GMPs without further guidance from the government on an acceptable methodology for doing so. In 2012 the DWP issued draft regulations and a draft equalisation methodology for consultation, but these were widely regarded as unsatisfactory and “gold-plating” members’ benefits. The DWP subsequently withdrew its proposals and announced that a less onerous method of equalisation would be identified. A consultation paper outlining a new proposed method and guidance was released at the end of November 2016.
Consultation Paper – GMP equalisation
The new methodology for GMP equalisation is the product of a working group of practitioners from across the pensions industry brought together by the DWP. The proposed method set out in the consultation paper involves a one-off calculation and actuarial comparison of the benefits a man and woman would have for the period from the Barber decision (17 May 1990) to 5 April 1997, with the greater of the two converted into ordinary scheme benefits under the GMP conversion legislation (which would be amended to ensure it was fit for this purpose).
The paper highlights that the government is not placing any obligation on schemes to use the proposed method, which is simply one way of equalising for the effect of GMPs that the government believes meets the equalisation obligation derived from EU law. A detailed 10 stage methodology is provided, together with a note of some practical difficulties that schemes may face when using this and how these might be addressed.
Consultation Paper – other points
In addition to the long-awaited GMP equalisation methodology, the consultation paper includes a miscellaneous collection of changes to existing contracting-out legislation, including:
- reducing the statutory fixed rate for GMP revaluation from 4.75% to 4% for early leavers on or after 6 April 2017;
- clarifying the provisions relating to the circumstances in which GMP benefits transferred in from another arrangement can continue to be revalued on the same basis as was used pre-transfer;
- giving HMRC a discretion to extend the notification and payment periods to allow late payment of contribution equivalent premiums identified as a result of HMRC reconciliation exercises; and
- increasing the protection of formerly contracted-out members’ benefits by tightening up on the requirements relating to changes to scheme rules of a formerly contracted-out scheme.
However, not all issues have been covered. A particularly significant omission is any proposed legislative changes to address the current inability to transfer accrued contracted-out rights without member consent into a scheme which has never previously been contracted out.
Going Forward
This consultation can be interpreted as a commitment from the government to resolving the issue of GMP equalisation. Whilst the proposals are non-binding, trustees now at least have more certainty over what is expected of them, and can be reassured that the suggestions are derived from a broad industry consensus. No immediate action is required, and so schemes have time to consider their options and seek any necessary advice while awaiting the government’s final guidance and legislation. The consultation window closes on 15th January 2017.