GMP equalisation: the DWP calls time!
After years of speculation, the DWP has finally published proposals for dealing with the intrinsic inequality of GMPs. As well as a consultation on draft regulations, the DWP is also consulting on a “possible method for equalising pensions for the effect of the [GMP]”.
In this Alert:
- Key points
- GMPs – a brief history
- Equalisation of benefits
- The Government’s method
- What about a test case?
- What does this mean for trustees?
- The DWP has concluded that schemes are obliged to equalise overall scheme benefits “for the effect” of GMPs which accrued between 17 May 1990 and 5 April 1997 inclusive1.
- In the Government’s opinion, under EU law2, there is no need for an opposite sex comparator when considering any inequality in GMPs.
- If the DWP’s method of equalisation is adopted, there will be no obligation on schemes to use it.
- The consultation (to which Sackers will be responding) closes on 12 April 2012.
From 6 April 1978, individuals could accrue an entitlement to an earnings-related addition to their basic state pension, called the State Earnings Related Pension Scheme (SERPS). An employer could contract its scheme out of SERPS if it was designed to provide a pension at least as good as a statutory minimum, known as the GMP. The GMP is a component of a member’s total scheme pension.
The method of calculating GMPs is set out in legislation. It is possible for the GMP component of a scheme’s benefits to be unequal between the sexes because:
- GMPs accrue at different rates for men and women;
- GMPs are payable from different ages (65 for men, 60 for women); and
- a member’s GMP increases at a different rate from their scheme pension.
GMP accrual was abolished from 6 April 1997 onwards.
In the Barber case (17 May 1990), the ECJ ruled that occupational pensions were deferred pay and, as such, schemes were required to treat men and women equally. As a result schemes “equalised” their retirement ages, often at age 65, and adjusted their benefits accordingly. However, as the rules governing GMPs are set out under legislation, there was some doubt as to whether Barber applied to GMPs.
Where any inequality is the result of legislation, there has also been uncertainty as to whether there is a need for a “comparator” – namely, a worker of the opposite sex who is being treated more favourably. The DWP has now concluded that European case law does not require a comparator where state legislation (in this case the UK’s unequal state retirement ages and its effect on GMPs) is at issue. It is therefore making changes by regulation to remove the requirement for a comparator in relation to GMPs.
Broadly, the DWP’s possible method relies on a comparison between a member’s GMP (under the scheme rules and the relevant legislation) and their GMP had they been of the opposite sex. Each year, the scheme would then pay the member the higher of:
- the amount they would receive under the scheme rules; and
- the amount they would have received under the rules were they of the opposite sex.
In addition, schemes would need to address the date benefits come into payment. If a member would have been entitled to their pension earlier had they been a member of the opposite sex then the pension “should be put into payment at that earlier age”.
The DWP is at pains to stress that, if published, its method “would not be legal advice to schemes on how to equalise, or be a definitive statement on how to equalise”.
There has been much discussion of a possible test case on GMPs which the DWP acknowledges in the consultation. However, the DWP dismisses the possibility of sponsoring a test case as it believes that this would merely “prolong the uncertainty”.
It is worth remembering that only schemes which have GMP liabilities are affected by the consultation and only in respect of accruals between 17 May 1990 and 5 April 1997 inclusive.
What trustees do next will depend upon their scheme’s own particular circumstances. Comfortingly, the DWP states that where trustees are “content that they have fully met their legal obligation regarding equalisation, they need take no further action”.
However, for the many schemes yet to address the issue of GMPs and equalisation, given that we are only at the consultation stage of proposals which have taken over twenty years to come to fruition, a “wait and see” approach would seem to be the most sensible.