2019 looks set to be the year in which pension schemes finally address GMP equalisation following the landmark judgment in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc. We look here at seven key questions scheme trustees need to consider.
1. What equalisation method will we use?
In the Lloyds Bank judgment, the court approved a method based on providing the better of the male and the female pension each year. If who is better off changes over time, the employer can require offsetting rather than the member getting "the best of both worlds" each year. It can also require an interest rate to be applied to reflect the value to a member of getting money early. A supplementary judgment on 6 December clarified that another method is possible if the employer consents. This involves using legislation that allows GMPs to be converted into non-GMP benefits. This method involves calculating the actuarial value of the benefits (before equalisation) then taking the higher of the benefit value for a man and a woman and using that for the conversion process. For many employers, it is likely to be their preferred equalisation method due to its "one off" nature.
2. Now that we have the judgment, is there any reason not to equalise as soon as possible?
Making changes to benefits can have tax consequences, particularly for members who are at risk of exceeding their annual allowance or lifetime allowance under pensions legislation. The DWP has said it is working with HMRC to investigate whether changes might be necessary to tax legislation, so there may be a case for awaiting the outcome of those discussions before adopting equalisation measures.
3. What about past underpayments?
The judge in the Lloyds Bank case ruled that beneficiaries are entitled to past underpayments and awarded simple interest on such payments at 1% above base rate. He held that there is no statutory limitation period regarding how far back claims can be made (at least in cases where the scheme still exists), but that the position is governed by a scheme's rules dealing with forfeiture of unclaimed benefits. It's common for scheme rules to provide for forfeiture of unclaimed benefits after 6 years, but the precise wording could be crucial, eg whether it provides that benefits "shall" or simply "may" be forfeited. So it's essential for trustees to understand what their own scheme rules say on this point.
4. What about transfers in and out?
The parties to the Lloyds Bank case agreed that an obligation to equalise would apply to benefits transferred into the scheme. On the question of whether schemes remain liable for benefits transferred out, the parties put detailed arguments before the court, but decided that the judge should proceed to judgment without ruling on this point, so this is another big area of uncertainty which may or may not be the subject of a subsequent ruling in the Lloyds Bank case. Trustees should therefore consider whether the value of transfers into or out of the scheme has been significant. For transfers out, the issue is that trustees may still have liability for the cost of equalisation. For transfers in, it's clear the trustees are liable for equalisation. The issue is whether they may have rights against the trustees of the scheme from whom the transfer value was received.
5. Do we have many cases where the cost of implementing equalisation will exceed the value of any additional benefit?
The parties to the Lloyds Bank case raised this issue, but then decided to ask the judge to hold off ruling on this point, so we don't yet know whether this issue will be brought back before the court.
6. Are there any other points on which it may be worth waiting for clarification?
The DWP has said it plans to issue guidance on GMP equalisation, though it hasn't given a timescale. The guidance may give a helpful steer on points of detail, but can't override a court decision.
7. What issues require the most urgent attention?
- Transfer value requests: what if trustees don't yet know whether the member will be due extra benefits as a result of equalisation? Our view is that it's not normally appropriate to suspend transfer values, but if members who may be due an "equalisation top up" are transferring out, this requires careful communication, particularly as a receiving scheme might not be willing to accept a subsequent top up payment.
- Benefit payments: serious ill-health lump sums and trivial commutation lump sums require particularly careful consideration given tax rules requiring the benefit to take the form of a single lump sum, and the potential for an equalisation top up to take a lump sum over the trivial commutation limit.
- Member communications more generally: trustees should consider preparing member communications either to respond to queries about GMP equalisation generally or to issue with transfer value quotations.
- Valuations: depending on where they are in the scheme valuation cycle, trustees may need to consider urgently whether provision should be made for GMP equalisation in circumstances where there has not yet been time to calculate a precise figure for equalisation liabilities.
- Engagement with employers: as some equalisation approaches require employer consent, trustees and employers should engage with each other regarding the proposed approach to equalisation. Many employers will also already have had to consider how equalisation liabilities impact their accounts, but thinking on this may develop as more precise calculations are carried out.
- GMP reconciliation: many schemes will still be grappling with GMP reconciliation queries following the end of contracting-out. Clearly, an accurate assessment of GMP equalisation liability requires accurate GMP data, so trustees should work towards ensuring that outstanding queries are resolved as soon as possible.
It has now been firmly established that trustees must adjust scheme benefits to equalise for the effect of GMP legislation which treats men and women unequally, so "parking" the issue indefinitely is no longer an option. However, it seems likely that we will see further clarification of some of the surrounding issues during the coming year, particularly regarding the tax consequences of equalisation measures. At this stage we think it makes sense for trustees to have an equalisation plan which distinguishes between issues requiring an urgent decision (eg approach to current transfer value requests) and issues in relation to which a "wait and see" approach still makes sense in the short-term.