On the go: The Department for Work and Pensions has set out a 10-stage process for UK pension schemes to equalise guaranteed minimum pensions.
The guidance walks trustees through the tricky process of making good the differences between male and female members brought about by contracting out of the additional state pension.
Equalisation has been required under EU law since a ruling by the European Court of Justice in 1990. However, schemes had to wait for subsequent rulings to establish that disadvantaged members must be compensated for their lower payment, and were only given clarity on the preferred methods for equalisation by a court case involving Lloyds Bank last year.
The DWP's 10 stages are as follows:
Trustees must gain the consent of their employer or employers, past and present, to undertake equalisation.
Schemes should identify which members need their benefits converted, which benefits are to be changed, and what the form of the new benefits will be.
A date is set for conversion
The selected members should then be consulted on the proposed conversions, with views sought on the high-level details of the conversion.
A scheme actuary should then be instructed to value the benefit to be converted, and also the amount of that benefit if the member is of the opposite sex.
A conversion value should then be generated, based on the higher of the two amounts previously valued.
That conversion value is then turned back into a pension benefit, all using a consistent approach to that used in the valuation process.
Actuaries should certify the completion and equivalence of the equalisation.
Any modifications to the scheme necessary to effect the conversion should be carried out.
Members and survivors should then be notified.
The guidance leaves open the possibility that conversion may involve changing all or a significant part of a member's benefits to a simpler structure, rather than focusing narrowly on those accrued during the GMP 'Barber window'. Benefits must be actuarially equivalent and comply with other regulations.
It confirms the Lloyds judgment's finding that members are entitled to arrears for pensions already in payment, with no period of limitation.
However, it also leaves certain areas requiring further clarification. "Government is considering changes to the GMP conversion legislation to clarify certain issues," the guidance states.
Trustees will be anxious to proceed on equalisation, not least because bulk annuity insurers are likely to give the best pricing to converted schemes.
However, said Anna Rogers, senior partner at Arc Pensions Law, there are still hurdles to be cleared.
"There are still some obstacles in legislation that will affect different schemes differently," she said. "Members’ benefits have to be protected – the replacement benefits have to be certified to be actuarially equivalent, and pensions in payment can’t go down."
One legal trap could involve the gaining of consent from scheme sponsors where the employer has changed over the years, according to Ms Rogers.
She added: "In practice, we expect some schemes will be looking for ambitious restructuring that would see the current pension go up significantly, by front-loading the future pension increases. That has implications for some members who might face tax charges as a result, so care will be needed."
The full guidance can be found here.
