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GMP equalisation – is the Lloyds judgment only the next chapter in the saga?

There was initial elation among the pension industry that Mr Justice Morgan had produced such a thoughtful and comparatively easy-to-follow judgment on the vexed question of Guaranteed Minimum Pension (GMP) equalisation.

However, on further analysis, the issue of how to equalise GMPs without the risk of further challenge seems just as elusive as ever.

The answer is not to leave such a critical question to a judge to decide an individual set of scheme-specific facts, but for the Government to be brave and actually legislate on the point. It is only with this that there will be sufficient certainty for advisers to be able to advise with clarity on what is required.

All we are really left with from the judgment is that GMPs do need to be equalised – a conclusion many advisers had reached some years ago. The “hows” are still open to debate.

There is to be a further hearing to determine whether GMPs that have transferred out of a scheme still have to be equalised by that scheme. This hearing is due before the end of 2018 but we do not yet know when this additional judgment might be given. After this, the parties have 21 days to decide whether to ask for leave to appeal the judgment – either in whole or in parts. 

Act in haste, repent at leisure – what may be challenged in the judgment

Potential member challenges

These are likely to revolve around whether the analysis in the judgment is correct over the ability of employers and pension trustees to rely on any restrictions that might be written into their scheme rules over how far back members can claim unpaid benefits.

The analysis seems wrong for various reasons:

GMPs have been paid to members, just not on an equalised basis – should they really be classified as unpaid scheme benefits?

Relying on the terminology in each scheme’s rules over what happens to unpaid benefits is a lottery. It doesn’t seem appropriate that whether – and to what extent – GMPs, a substitute to state pension, have to be equalised should depend on the arbitrariness of individual scheme rules, particularly when legislation is very prescriptive over the GMP benefit itself. This would be a replay of the RPI/CPI fiasco.

Pension professionals, and to a lesser extent pension trustees and employers, have long suspected that GMPs do have to be equalised. The DWP has also issued announcements stating that this should occur, but then ducked out of actually saying how this should be done. For every year that has passed, and continues to pass until there is clarity on how to equalise GMPs, trustees and employers will benefit from delaying the payment of equal GMP benefits if their rules have a limitation period in them. This seems inequitable especially as regards the pension trustees and their members. It raises questions, and potentially further court cases, as to why pension trustees did not push to equalise GMPs sooner and go to court themselves if they were not certain how to do so.

The Equality Act 2010 is part of the reason given by the judge to say that employers and trustees can rely on time periods set out in scheme rules for only going back six years when looking at paying out equalised GMPs. Given that the Equality Act itself is meant to represent EU requirements, this part of the judgment seems to bring into question whether the Equality Act – by allowing these temporal restrictions – has in fact correctly reflected the EU Directive on equal treatment.

Potential employer challenges

These are less likely because the judgment is quite pro employer. However, there may well end up being a concern about the correct treatment as regards the equalisation of transfers in to a scheme of GMPs and transfers out of GMPs. 

The judgment specifies that transfers in of GMPs do have to be equalised by the receiving scheme as they form part of the scheme’s benefits. This is fine as far as it goes in abstract, but historically the position taken has been that a scheme that transfers out unequal benefits retains responsibility for equalising those benefits as it failed to transfer out equal benefits, even though practically this is difficult to do. This is the subject of an extra hearing and it will be interesting to see how the judge reconciles these two points.

Additionally in the 1990s, when the pensions industry was still working out how to equalise main scheme  benefits, many schemes would only go ahead with transfers if they obtained an indemnity over equalisation. Such indemnities appear routinely in bulk transfer/merger agreements, and to a lesser extent in annuity buy in/out documentation. It will be interesting to see whether these now bite or whether they also form the subject of further disputes.  

Pensions is too important to be left to judges…

While this judgment gives the UK government a clear steer about GMP equalisation, it would best if the UK government now stepped in and passed specific legislation for GMP equalisation that worked for all schemes and which dealt with, for example:

  • Whether trustees and employers can properly rely on limitation periods in schemes rules
  • What methodology to use for equalisation
  • Whether and how pension schemes’ rules should be amended to allow for GMP equalisation
  • What action to take where insurance companies won’t take action themselves to alter annuities to equalise GMPs.

Without this type of definitive action, we can look forward to another 10 years of wrangling about GMP equalisation.

Published: November 2018 

Key Contact

Penny Cogher