Anna Rogers, Senior Partner and specialist pensions lawyer at Arc Pensions Law examines this updated guidance and notes that, when it comes to GMP equalisation on past transfers, the new PASA guide explains the complexity of the situation well.
The pensions world continues to be rocked by legal developments that must look, at best, obscure to the non-specialist. Rulings relating to Lloyds Banking Group staff pension schemes have caused industry-wide despair and frustration as the Courts seem to require impossible rewriting of history at an administration cost that will far outweigh the increased payments to members. The industry has been pondering how to address the widespread recalculations that we now know are required for members with benefits accrued in the 1990s, often without adequate historical data records. The latest twist of the knife was the 2020 ruling that schemes have to top-up transfer payments they made over the last 30 years in order to make usually very small adjustments for legacy equalisation issues.
By way of background, explicit age and sex discrimination are deeply embedded in defined benefit (DB) pension schemes. Counter-intuitively to outsiders, many aspects of the traditional benefit design discriminated against men. Women lived longer on average and they could retire earlier. That meant £1 of pension was more valuable to a woman. The ECJ ruled in 1990 that pensions were pay. Since then, the industry has struggled with the move to equality against a background of rising costs due to increasing guarantees and reducing investment returns. The solution has largely been to level down but progress has been ‘non-linear’. It took too long to realise what was needed to level down validly. Most of the issues are now well understood and men and women are in general treated equally. There are still pockets of permitted discrimination; many schemes still use sex as a basis for placing actuarial value on benefits, which has been outlawed in insurance.
There is however an intractable sex discrimination issue regarding GMPs. It affects schemes that contracted out of the State Earnings Related Pension Scheme between 1990 and its abolition in 1997 (most schemes did). The SERPS pension accrued at a faster rate for women and was payable at 60 rather than 65. Contracted out schemes had to provide a guaranteed minimum pension (GMP) to replace it. Case law shows that the statutory GMP is what it is, and can’t be equalised, but if the overall scheme pension would be different for a man and a woman the higher must be paid. In other words, the discriminatory effect of the GMP inequality has to be eliminated. It’s not obvious how to do this. The female GMP may be bigger or smaller than the male GMP depending on a number of circumstances about the member and the scheme. That can change during the course of retirement. And the really tricky part is that having a bigger GMP might be a good thing or a bad thing.
A bigger GMP might result in a smaller overall pension. Don’t ask.
Fortunately, the Pensions Administration Standards Association is on the case. Its broad membership covers administrators, actuaries and pension lawyers across the industry who have put in a lot of work to produce guidance on GMP equalisation over recent years. The Group has updated its guidance to address the Lloyds 2020 judgment, looking at the role of trustees who made and received transfers. PASA warned that a number of uncertainties remain that, because of the associated costs and the relatively small sums involved for members, may never be settled by the courts. Although the guidance does a good job of explaining the difficulties that schemes may be facing, and the issues they and their advisers should take into account, it can’t offer any simple solutions, rightly emphasising the need for legal advice.
In practice, it will be necessary for consensus views to develop. Few schemes have so far taken any action. Some DB schemes are going to have to find solutions quite fast because they want to complete winding up. Calculations need to be done as best they can be and based on reasonable assumptions to fill in data gaps. Schemes that have done GMP equalisation for current members have a head start as they know the profile that makes a top-up likely based on their own benefit structure.
Where only a few ex-members need top-ups, it may be feasible to explore them case by case. It may be easy to pay the receiving arrangement; or impossible; or the situation may be unclear. The cost of tracing, getting authority, corresponding and agreeing with ex-member and receiving arrangement, and implementing the top-up if one can be made, can easily outweigh the amount of the top-up.
Ideally, schemes need a way to deliver fair compensation to the ex-member in a cost-effective manner that does not involve this unwieldy process. Unfortunately, the nature of the paying scheme’s obligation is unclear, as is the nature of any entitlement the receiving arrangement may have to receive the top-up. The top-up is not a benefit, so tricky to validly commute, and it’s due to a third party not to the member. Getting a neat and tidy discharge is going to be a challenge.
The legal minefield is well set out in the guidance. Ultimately trustees will want to find pragmatic solutions but it’s hard to be pragmatic in a vacuum. It will be important for trustees to show they have engaged with the issues in good faith and done their best to resolve them. Trustees are not required to do the impossible. We saw once again in the recent Axminster case a Judge saying “what is required is a rational and proportionate response to the administrative difficulties”.
It’s time for the first movers to find ways to protect both members and trustees. With all the brainpower available across the pensions industry, hopefully market solutions will soon emerge.