01 November 2018

The High Court has today ruled that Lloyds Banking Group must amend its three defined benefit (DB) pension schemes in order to equalise Guaranteed Minimum Pensions (GMPs) for men and women. 

This is a landmark ruling, which could cost Lloyds up to £500m. Around 230,000 female members of the Bank's schemes are expected to be impacted because they joined between 1978 and 1997 and accrued GMPs in lieu of State pension. 

Moreover, total costs across all DB schemes that have members with GMPs could be around £20 billion.

The judgment is the final substantive piece of the equalisation ‘jigsaw’ following the Barber v GRE ruling in 1990 and the myriad of equal treatment cases that followed it. Nevertheless, there will be ancillary issues from the case in respect of which further litigation may be needed.

What are GMPs?
The State Pension for people who reached State Pension age before 6 April 2016 had two tiers - the basic State Pension (which was flat-rate and dependent on an individual’s NI record) and the additional State Pension – which was partly earnings-related.

It was possible to contract out of the additional State Pension into an occupational pension scheme that met set criteria. Where an employee was contracted-out, they and their employer paid a reduced rate of National Insurance (NI), to reflect the fact that they were forfeiting additional State Pension rights for that period.

Between 1978 and 1997, contracted-out schemes were required to provide a Guaranteed Minimum Pension (GMP). Since 1997, a different test has applied but contracted-out schemes still have to provide a GMP for rights accrued between 1978 and 1997.

The Court was asked three questions –

  1. Do GMPs need to be equalised?

  2. If so, how?

  3. If so, how should trustees exercise their powers?

Mr Justice Morgan ruled that - “The Trustee is under a duty to amend the schemes in order to equalise benefits for men and women so as to alter the result which is at present produced in relation to GMPs”. 

Lloyds are also required to make back payments to make good historic underpayments.

In considering how equalisation should be achieved, the Court rejected the most generous approach to equalisation. Instead, whilst not setting a firm methodology for equalisation, it chose a lower cost alternative, which still requires schemes to carry out an annual assessment of male and female members’ GMP entitlements and equalise them where necessary. However, trustees and sponsors could explore alternative options that would avoid the need for this onerous and expensive process.

As mentioned in our previous Alert, trustees will need to consider – 

  • The integrity of GMP data because how can you equalise something if you are not sure your GMP records are correct in the first place? GMP equalisation is another reason why all schemes should be reconciling their GMPs with HMRC data before this option ceases to be available at the end of the year.

  • What they are going to do about benefit recalculations for current, prospective and contingent pensions (where an inequality is discovered then members will always be due a top-up; i.e. unlike GMP reconciliation, equalisation will not result in any overpayments having to be recovered)?

  • What they are going to do about more difficult cases - commutations, transfers, deaths, etc.? The High Court is not expected to provide any guidance on this.

  • The impact on scheme liabilities / funding.

Employers will also want to know about the impact on scheme funding but, in addition, they need to consider the impact on their financial statements. 

Accounting standards require companies to recognise liabilities that they have a legal (or constructive) obligation to provide. The legal clarity provided by the ruling will effectively require trustees to equalise GMPs and so triggers the need for immediate action in accounting disclosures.

Companies will be required to include this additional liability on their balance sheets which will lead to increased deficits or reduced surpluses. It is also expected that the impact will be treated as a plan amendment and so will be immediately recognised in Profit & Loss (P&L). Companies need to consider the impact of this now and amend budgets or forecasts if required.

The increase in liabilities could be 1-3% depending on the scheme demographics and historic benefit structures which is not necessarily a significant balance sheet event compared to the potential impact of market movements in any given period. However, 1-3% of liabilities recognised through P&L could be a material figure and create issues with company budgets and forecasts. 

There are possible alternative approaches to accounting for this (for example through other comprehensive income or treating it as an error resulting in restatement of prior years). However, we believe that the most likely outcome is that auditors will expect it to be recognised in P&L.

Speaking at the Society of Pension Professionals annual conference, Allen & Overy partner, Jane Higgins, said that schemes should be thinking about how they communicate with their members. Allen & Overy are legal advisers to the trustees of the Lloyds Bank pension schemes. 

According to Higgins, trustees should be thinking about managing member expectations – 

“… actually thinking about communications to members and starting to manage expectations to the extent you can, because it’s not going to be a day one simple answer as to how it impacts members, you are going to have to go through quite a long process with the answers and then you’ll find a way to do it”. 

Addressing inequalities in GMPs will be a major project but, at the end of it, there is an opportunity to simplify scheme administration by converting the equalised GMPs into ordinary scheme benefits; i.e. you can get rid of the ‘GMP headache’ for good

In other words, this ruling provides an opportunity to get rid of the ‘GMP headache’ for good and, at the same time, remove other historic  complications through a full scheme benefit conversion.

For more information please contact: John Wilson | +44 (0) 131 456 6850 | 

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