The High Court has held that pension schemes are required to equalise benefits for the effect of guaranteed minimum pensions (GMPs) accrued between 1990 and 1997. The Court also considered a number of possible equalisation methods.
It held that the employer could require the trustees to adopt the cheapest method.
GMPs are a minimum benefit that schemes which were contracted-out on a salary-related basis between 1978 and 1997 are required to provide. The rules governing the accrual and payment of GMPs are set out in legislation. Those rules differ as between men and women in a number of respects – in particular, GMPs are payable at age 60 for women and age 65 for men.
Starting with Barber in 1990, a series of court decisions have established the broad principle that occupational pensions earned from 17 May 1990 must be equal for men and women. However, another series of court decisions have established that state pensions do not have to be equal.
Until now, it has not been clear:
- whether benefits must also be equalised for the effect of unequal GMPs (since GMPs are a replacement for a state pension benefit); or
- if benefits must be equalised, how this should be achieved (since the question of which sex has the higher overall benefit will differ from one case to another, and may change over an individual’s lifetime).
The equalisation requirement and equalisation methods
The Court concluded that trustees must equalise benefits for the effect of GMPs accrued between 17 May 1990 (the date of the Barber decision) and 5 April 1997 (when GMPs ceased to accrue). The Court also considered various possible equalisation methods. It held that all but one of the suggested methods achieved equalisation, but that the employer could require the trustees to adopt the cheapest method. This method involves providing the better of a male or female comparator pension each year, subject to a process offsetting accumulated prior gains and making an allowance for interest on those accumulated gains.
The Court held that trustees must correct future benefit payments and past underpayments. The Court concluded that no statutory limitation period applies to past underpayments. However, scheme rules under which unclaimed pension instalments are forfeited may be enforceable – this will depend on the wording of the rule in question. The Court also held that any arrears of payments should be paid with interest at 1% over base rate.
Implications for employers
GMP equalisation will increase the scheme’s liabilities and involve additional administration and adviser costs, all of which will ultimately be borne by the employer. Employers should therefore engage with the trustees on their approach to GMP equalisation to ensure that they are happy with the approach adopted.
It is important to note that several issues remain undecided by the Court, such as the treatment of past transfers-out, and some of these issues may be the subject of a further Court hearing. Therefore there may be future developments which affect the extent to which, and the way in which, schemes are required to comply with the equalisation requirement.