GMP equalisation: Was it worth it?

For example, take the thorny issue of guaranteed minimum pension equalisation.

For the past 18 months, thousands of schemes have been grappling with a legal requirement to equalise pension benefits for millions of men and women who were contracted out in the 1990s.

This followed a landmark legal case in 2018, which ruled that the Lloyds pension scheme should equalise pension payments for men and women, after female plan members complained that their pension incomes were increasing at a lower rate than those of male counterparts. 

This practice was allowed under the rules of their so-called GMPs, or the baseline pensions that employers had to provide to contracted-out workers.

There is now a great risk that implementation costs of equalisation will be disproportionate to the actual benefits for many members who, in most cases, will see small uplifts

The High Court ruling was significant, as the requirement to equalise GMPs did not just apply to the Lloyds scheme, but to thousands of other defined benefit schemes with contracted-out members.

Getting on with the complex task of GMP equalisation is challenging enough for schemes effectively having to recreate three decades of data to identify those impacted, a process made even more difficult by missing and incomplete records. 

But implementation has been hampered by a lack of official guidance in key areas, such as whether members getting a boost to their pension, following an equality recalculation, would subsequently be exposed to tax charges for lifetime allowance breaches.

Trustees have had to navigate a minefield of issues, including choosing the best method of adjusting benefits that is fairest to affected members.

But 18 months on from this landmark ruling, those gaining from the judgment are not the majority of members – who, in the main, will only see a modest uplift to their pensions – but lawyers and actuarial consultants providing advice in this uncertain landscape.

Trustees in a moral quagmire

This situation has come about for several reasons. First, a lack of timely guidance from HM Revenue & Customs on key tax issues – related to equalisation uplifts – has left trustees in a moral quagmire.

They have a duty to ensure their members get the right benefits, including those impacted by the 2018 GMP ruling. But a corresponding need to get on with equalisation, as well as conducting business as usual activities, has resulted in pragmatism taking a priority over fairness for all members.

For example, trustees are being encouraged to ignore certain categories of members who they have a legal duty to equalise, such as those who have taken trivial lump sums, or those in receipt of survivors’ pensions. 

If these so-called ‘no further liability’ cases do not come forward to raise an issue, they are unlikely to have their pensions corrected. This approach may spare the scheme administrative costs, but it creates the perverse situation of new inequalities between members.

Insurance deals add pressure

Second, trustees have come under pressure to proceed with insurance deals to secure the scheme, even when guidance on tax implications for members is yet to be fully sorted by HMRC.

Last year was a record for buyouts and buy-ins, yet insurers were favouring a method of settling GMP issues, or conversion, which may not have been best for some schemes but was the most competitively priced. 

Schemes wanting to complete buyouts today face a no-win situation with HMRC to confirm that conversion will not result in some members facing unexpected tax bills, issues that may only emerge after buyout.

All this uncertainty has meant that trustees have had a greater need to turn to their advisers for help on how to navigate uncertainties, and indeed mop up any issues that may flow after guidance is finalised, including how to deal with transferred pensions. These professionals do not come cheap.

There is now a great risk that the implementation costs of equalisation will be disproportionate to the actual benefits for many members who, in most cases, will see small uplifts.

The Lloyds workers who fought for pensions equality cannot be held to blame for this costly saga. It is right that pensions – as deferred pay – should not be excluded from equality law. HMRC should now move urgently to clarify guidance on tax issues related to GMP conversion. 

The longer this drags on, the bigger the risk that scheme costs will rack up. Equality should not come at too great a cost for members.

Josephine Cumbo is pensions correspondent for the Financial Times