Poor scheme data threatens to undermine GMP equalisation

Last month, the High Court ruled that defined benefit pension funds must equalise GMPs between men and women. Pension schemes will have to address GMP inequality back to 1990.

The decision addressed the case of three female Lloyds Banking Group scheme members. They argued that sex discrimination had taken place on the basis that their pensions had increased at a lower rate than those of men.

The need to retain multiple records for every member will add significantly to a scheme's administration costs and it will add great complexity

Samantha Brown, Herbert Smith Freehills

Schemes agree with court decision

A recent survey of sponsors, trustees and advisers regarding the implication of the recent Lloyds Bank case, found that 78 per cent of respondents thought the judge was correct to conclude that trustees need to equalise members’ benefits for the effect of GMPs.

However, 61 per cent said they did not expect their scheme – or those they advise – to have sufficient data to equalise members’ benefits.

The research, carried out by law firm Herbert Smith Freehills, also found that 53 per cent of respondents identified the ongoing administration associated with paying equalised benefits as the biggest challenge with implementing the judgment. Forty per cent said it will be incomplete data.

Trustees will struggle to plug data gaps

That 61 per cent of respondents did not expect their scheme to have sufficient data regarding equalisation is unsurprising, according to experts.

Samantha Brown, pensions partner at Herbert Smith Freehills, noted that, in order to implement GMP equalisation, schemes will need salary data going back nearly 30 years.

“Many schemes will not have retained this information, particularly for pensioners, as it is common for schemes to cleanse data that is no longer needed once pensions have come into payment,” she said.

Even those schemes that have retained this information may well have gaps for some members. For example, many schemes will not ever have kept records of the 1990-1997 GMP as it has not previously been needed, Brown said.

"Depending upon the circumstances, trustees may be able to make certain assumptions about the missing data, which they can then use to calculate members' equalised benefits,” Brown said.

Incomplete data could also provide grounds for trustees to compromise members' claims, she said, although this "may require the Court's blessing”.

Charles Cowling, chief actuary at JLT Employee Benefits, said the obvious way forward for schemes is a full conversion of GMPs into a regular scheme benefit.

Simplification and equalisation could be achieved by grouping members together and topping up benefits for service between the dates involved in equalisation.

“You effectively calculate a transfer value for an individual, you increase that transfer value by the extra value that you need to give to allow for GMP equalisation, and then convert that transfer value back to a much simplified form of benefit,” he said.

Admin costs loom

For many, the additional administration costs associated with paying equalised benefits could exceed the dent to their funding levels resulting from equalisation, said Brown.

"If trustees use method C2 or one of the other methods approved by the Court they would be required to maintain at least three benefit records for all affected members,” she noted.

This would include one keeping track of the member’s actual pension entitlement – before it is equalised, another keeping track of the entitlement of an opposite sex comparator and a third keeping track of the actual equalised pension that is put into payment, until the member dies.

"The need to retain multiple records for every member will add significantly to a scheme's administration costs and it will add great complexity,"she said.

Seventeen per cent of respondents to the survey said their scheme, or those that they advise, have decided to temporarily suspend transfers while they decide their approach.

According to Brown, many trustees are raising concerns about how to deal with transfer payments that are in the pipeline, asking whether they should suspend them or apply adjustments.

However, she noted that suspension of transfers should be kept to a minimum. If schemes fail to pay transfers within the statutory deadlines the trustees could be fined by the Pensions Regulator.

Given the greater certainty from the court on GMP equalisation, temporarily suspending transfer value quotations and transfer value payments may be sensible, said Wendy Hunter, partner at law firm Squire Patton Boggs.

Trustees should be “telling members and making them aware that transfer values are currently not including an element for the equalisation, and asking members if they wish to proceed”, she added.