Guaranteed Minimum Pensions equalisation: new DWP proposals released

13th December 2016

Guaranteed Minimum Pensions equalisation: new DWP proposals released

GMPs and equalisation: the background

The GMP is a minimum level of pension benefit which must be provided by those defined benefit schemes which were contracted out of the state earnings-related pension scheme (SERPS) on a salary-related basis between 1978 and 1997. Because of the fact that under statute, the age at which the GMP must be paid is different as between men (65) and women (60) and consequently the rates of accrual differ as between the sexes, GMPs are inherently unequal benefits.

Since the European Court of Justice (ECJ) case of Barber v GRE was decided on 17 May 1990, pension schemes have had to provide benefits on an equalised basis for men and women. UK legislation reflects this requirement. However, it has long been unclear whether, and if so how, schemes are required to take steps to remove inequalities resulting from GMPs accrued after 17 May 1990.

Because of these uncertainties, most schemes have chosen not to equalise GMPs to date (except when winding up or buying out benefits). In contrast, the DWP has consistently maintained that the law does require GMP equalisation, including in cases of single-sex schemes where the claimant would not be able to meet the normal legal requirement under discrimination law to point to a “comparator” (ie an individual of the opposite sex, engaged in comparable work, who has been treated more favourably).

In January 2012, the DWP consulted on draft regulations that were intended to remove the legal requirement for a comparator, by permitting the claimant instead to rely on a “notional” opposite sex comparator. These regulations also put forward a possible methodology which would (broadly) have required schemes to assess annually whether or not the member’s actual benefit entitlement was lower than it would have been if he/she had been of the opposite sex, and, if so, to increase the member’s entitlement to match that of his/her notional comparator.

This approach was widely criticised for unnecessarily “gold-plating” GMPs. Following an overwhelmingly adverse response to the consultation paper, the Government issued an interim response in April 2013, indicating that the DWP would carry out further work to identify a less onerous method of equalisation.

 

The new equalisation proposals

The new methodology for GMP equalisation is the product of a working group of leading practitioners from across the pensions industry which was brought together by DWP. To avoid the concerns around the original requirement for ongoing benefit comparisons year-on-year, the group specifically focused on whether equalisation could be achieved via the existing statutory process (under the Pension Schemes Act 1993) which allows GMPs to be converted into ordinary scheme benefits. This is the core of the approach set out in the current consultation.

The consultation paper makes it clear that the proposed methodology would not be mandatory and that the Government is not giving any legal confirmation that the methodology is guaranteed to meet equalisation requirements; instead, it is merely a suggestion as to how schemes may wish to equalise GMPs. (This is not surprising, since whilst the UK remains subject to the jurisdiction of the ECJ, it is unlikely that any method proposed by the Government could properly be made mandatory or put forward as a legal “safe harbour”. We comment further below on the implications of Brexit for this issue.)

The proposed methodology broadly requires:


  1. A one-off actuarial comparison of the future expected value of a member’s benefits (including GMPs and attaching survivor benefits) against the value of benefits of a member of the opposite sex (including GMPs and attaching survivor benefits), for the same period: generally in respect of contracted-out pensionable service from 17 May 1990 to 5 April 1997. The valuation of the future benefits can be carried out either using the scheme’s cash equivalent transfer value basis (assuming that the CETV basis is appropriate to the member concerned) or another suitable unisex actuarial basis.

  2. If the opposite-sex comparator’s benefit entitlement has the greater value, that value will be taken as the basis for future benefits to be provided to the member.

  3. To avoid pension schemes still being required to comply with the requirements of the GMP legislation, which would reintroduce inequality, the actuarial value identified at step 2 above will then be converted into an ordinary scheme benefit, with no GMP element.


As will be evident, conversion of GMPs into ordinary scheme benefits is key to the new methodology, but the existing statutory procedure for GMP conversion has been underused to date, because of various difficulties and uncertainties arising from the legislation. To prevent these issues from hindering the suggested equalisation approach, the DWP is also proposing certain improvements to the GMP conversion legislation, including:

  • Making it clearer in the legislation that the conversion will also include GMP benefits payable to survivors, as well as the member’s own GMP.

  • Replacing the requirement to consult members before conversion with a requirement to notify the members before and after conversion has taken place.

  • Removal of the power for the DWP to impose restrictions on transfers from schemes which have undertaken GMP conversion.


Consideration is also being given to whether other changes are needed (eg in relation to the obligation to provide a survivor’s pension as part of the post-conversion benefits), but there is no proposed policy position on these further changes as yet.

 

Other proposals covered in the consultation paper

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.


Unfortunately, the paper does not contain any proposals to deal with the current inability to transfer accrued contracted-out rights without member consent into a scheme which has never previously contracted out, though the DWP confirms that it is working on the problem and may be in a position to bring forward legislation from autumn 2017.

Finally, the DWP also takes the opportunity to fulfil an existing commitment to review two areas of contracting-out legislation which were the subject of earlier changes, including the rules around changes to accrued contracted-out rights held in a formerly contracted-out scheme and the transitional arrangements put in place following the abolition of contracting-out for defined contribution schemes in April 2012. In respect of both areas, the paper sets out certain issues of which the DWP is already aware, and merely invites respondents to provide details of any other concerns.

 

Comment

Given the long-standing debate between many industry stakeholders and the DWP over whether the equalisation of GMPs is required at all under case law, a number of commentators had suggested that the whole vexed question might simply be shelved following the results of the EU referendum on 23 June. However, although the section of the consultation paper which deals with the impact of the vote stops short of overtly stating that GMP equalisation will be required ‘come what may’, the very fact that the consultation has been published at this juncture rather than being held back pending further developments can be read as tacit confirmation that the Government remains committed to its previous policy.

Against that background, the consultation may well be appreciated by trustees and employers as providing materially greater certainty as to what is expected of them. The proposed methodology is likely to be welcomed as a “least worst” option to achieve the Government’s stated policy aim regarding equalisation, and is distinctly preferable to the proposals in the Government’s 2012 consultation paper. Despite the Government’s caveats that the consultation paper does not represent legal advice, trustees in practice may still take comfort from the fact that the suggested methodology appears to represent a broad industry consensus. In addition, the improvements to the GMP conversion legislation are in themselves a welcome development, and are likely to make it materially easier for schemes to do away with a whole layer of administrative complexity in the longer-term.

The proposed clarifications to resolve technical issues following the abolition of defined benefit contracting-out employment are likewise helpful, although some of the key areas of difficulty in the legislation (such as bulk transfers of contracted-out benefits and trivial commutation of GMPs) have yet to be tackled, and the industry can only hope that the DWP will prioritise these as far as possible.

Keep up to date on stories,
briefings and event information

  Social spotlight

Follow us

Our partners