In a landmark judgment handed down today in the case of Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc, the High Court has ruled that pension schemes are required to equalise benefits for men and women to offset the inequality that results from GMP legislation.
The judgment has implications for almost all schemes with defined benefits. Scheme trustees and sponsoring employers should consider the implications of the judgment for their own scheme.
Until 5 April 2016 it was possible for defined benefit pension schemes to contract out of the additional element of the state pension (often referred to as "SERPS" or "S2P"). For contracted-out employment before 6 April 1997, schemes were required to provide members with a "guaranteed minimum pension" (GMP). UK GMP legislation provides that the age at which a member becomes entitled to a GMP is 60 for women and 65 for men.
Decisions by the Court of Justice of the European Union in the case of Barber and related cases have established that for benefits accrued from 17 May 1990 (the date of the Barber judgment), pension benefits must be provided on an equal basis for men and women, and until a scheme has equalised benefits, benefits automatically accrue on the more favourable basis. However the UK government has not altered GMP legislation to reflect this principle.
Although there has been some debate among lawyers as to whether EU law actually requires equalisation in respect of GMPs at all, the government's position has long been that schemes are required to take measures to equalise benefits in relation to GMPs. Brexit is not set to alter the legal position, as UK Brexit legislation provides that EU Court judgments that pre-date Brexit will continue to have the same status as UK Supreme Court decisions. As the approach which schemes should take to equalise benefits has until now been very unclear, many schemes have simply continued to pay GMPs in accordance with UK legislation.
What did the court decide?
The judge held that schemes are obliged to equalise benefits to offset the unequal treatment that results from GMP legislation.
In a lengthy and detailed judgment he considered various possible methodologies put forward for achieving this. Rather than be proscriptive about the way in which equalisation can be achieved, he held that there was more than one methodology which could be used. However, this did not give the scheme trustees a free hand to decide which methodology applied. In the present case, the judge held that the principle of "minimum interference" requires the court to compare possible options and consider whether the obligation to provide equal benefits can be complied with in some other way involving less interference with the rights of any party. Applying this principle, the judge held that the Bank is entitled to require the scheme trustees to adopt a methodology that takes into account that a member who is currently being treated less favourably may have benefited from more favourable treatment at an earlier point in time.
The judge also considered the issue of back payments to members who have been treated unequally and concluded that a member's right to claim back payments depends on the rules of the particular scheme.
What action do you need to take?
For the first time since the issue of GMP equalisation arose, we now have a court ruling that the law does require GMP benefits to be equalised, together with a detailed analysis of possible methodologies and the principles which should be used when deciding the appropriate methodology for a scheme. Trustees will now need to consider with their legal and actuarial advisers what steps they should take in the light of the judgment.
Sponsoring employers of defined benefit schemes should liaise with the scheme trustees regarding their equalisation plans, as these could have significant costs implications, both in terms of additional funding costs and the costs of the equalisation exercise itself.
The judgment has attracted mainstream media attention, so schemes may find themselves contacted by members asking about the implications for their scheme, and trustees may wish to issue a standard communication to members to reduce the number of individual enquiries received.