Steps to take to equalise your guaranteed minimum pensions

The process of equalising compensation payments under the Financial Assistance Scheme and the Pension Protection Fund is already well underway, with the PPF recently completing a pilot process successfully. So what next for occupational pension schemes?

A brief history of GMP equalisation

The question of whether GMPs need to be equalised has exercised the industry since the European Court's decisions in pension equalisation cases of the early 1990s. 

In 2010, MP Angela Eagle confirmed the government's view that GMPs need to be equalised in order to comply with European laws on equal treatment. Industry opinion is still very much divided over whether this really is a legal requirement, the argument being that GMPs are not a benefit but simply a calculation factor. However, faced with the government's unequivocal view, it is hard to see how schemes can do anything other than equalise GMPs. 

Two years later, the long-awaited consultation paper was published setting out draft regulations and a proposed methodology for equalising GMPs.  The draft regulations, which remove the requirement to identify an opposite-sex comparator, were generally welcomed and will be laid as drafted. 

The proposed methodology, however, attracted widespread criticism as being overly complex and detrimental to schemes because of the gold-plated 'best of all worlds' approach that it adopted. So it was back to the drawing board on methodology.

The latest regulatory developments

In January the government confirmed contracting out on a defined benefit basis would be abolished to coincide with the introduction of the new flat-rate state pension (since brought forward to 2016). This added another dimension to the question of equalisation: might it now be possible to convert GMPs into scheme benefits (which must, of course, be equal between the sexes)? 

Yes, says the government. The draft pensions bill currently going through parliament deals with the abolition of contracting-out for DB schemes, and in particular contains a paragraph that requires the secretary of state to give "such guidance (if any) as he or she thinks appropriate about GMP conversion". 

While on the face of it that does not necessarily include GMP equalisation, Webb confirmed in the Public Bill Committee that "because it is not possible to convert GMPs into scheme benefits unless they have been equalised, this will provide guidance on an alternative method by which schemes can equalise benefits, including GMPs, prior to carrying out conversion".

The guidance is being prepared by the Department for Work and Pensions with input from representatives of industry bodies. Webb has expressed the hope that we all share – that the guidance will be helpful to schemes in relation to these "knotty and contentious" issues.

The current expectation is that guidance will be provided by spring 2014 although presumably not until the pensions bill, which confers the power to publish the guidance, has received Royal Assent. 

What actions should employers and trustees take?

For most schemes the most sensible thing will be to await the final legislation and guidance, hopefully next year. As we have seen from the many benefit equalisation cases in recent years, equalisation is not an easy subject and equalisation of GMPs is particularly complex. Trustees should use the time to ensure data is in good shape and to prepare for a flurry of activity next year.

The situation might be more urgent where a scheme is winding up. Trustees may need to balance the need to finalise the winding up efficiently with the need to ensure GMPs are dealt with appropriately. They will need to ask themselves whether it is better to wait, or to press on with the winding up.

Tamara Calvert is a partner in the employment team at DLA Piper