The long-running saga for the equalisation of pensions reached its latest chapter when on 20 January 2012 the UK Government finally produced draft guidance on how schemes could equalise their historic liabilities for guaranteed minimum pensions (GMPs). These GMP liabilities accrued for the period 17 May 1990 to 6 April 1997 for occupational pension schemes which had contracted out of SERPS (State Earnings-Related Pension Scheme). GMPs provide members of such schemes with an additional element of pension which broadly mirrors SERPS but which also reflected its inequalities.

For a link to the consultation documents please click here.

The DWP has now issued draft regulations (The Occupational Pension Schemes and Pension Protection Fund (Equality) (Amendment) Regulations 2012) and is now consulting on how schemes can best equalise GMPs in light of EU law.

The whole issue of equalisation dates back to 17 May 1990 and the decision of the European Court of Justice (ECJ) in Barber v Guardian Royal Exchange Assurance Group. In that case they ruled that it was discriminatory for schemes to provide occupational pension scheme benefits accruing at different rates and payable at different times for men and women. In the subsequent Coloroll case in 1994 the ECJ confirmed that pension schemes should have the same retirement ages for male and female members and that main scheme benefits should be “equalised” to reflect this. This obligation applied to benefits payable for pensionable service on or after 17 May 1990.

The UK government introduced this obligation to equalise into domestic law in the Pensions Act 1995 (now found in the Equality Act 2010) through the imposition of an equal treatment rule. While this principle was well established in respect of main scheme benefits, there remained considerable uncertainties about whether it extended to GMPs and, if so, how such benefits should be equalised. The position was further complicated in relation to Pension Protection Fund (PPF) compensation payments under the Pensions Act 2004. The Board of the PPF in assessing schemes’ eligibility impose an equal treatment rule, but latterly have sought to extend this to apply to GMPs as well.

The Proposals

The Government interprets the case law as requiring changes to the 2004 and 2010 Pensions Acts. The draft guidance and draft regulations issued by the DWP assume the existence of an “opposite sex notional comparator” when considering the different treatment between men and women with GMP entitlements.

The DWP consultation dismisses calls for a sponsored test case to answer any scepticism of the very need for equalisation and puts forward a potential method of equalising GMPs. The method proposes using this opposite sex notional comparator to work out what a member’s benefit would be if they were of the opposite sex with the entitlement being the higher of that amount and that of their own sex. If the member would be entitled to a pension at a date different than that of their opposite sex notional comparator, then they would receive payment at the earlier date.

The consultation period began on the 20 January 2012 and runs until 12 April 2012. Employers, Trustees and Scheme administrators will wish to monitor its progress as the proposals have already been criticised as unnecessary and poorly timed with possible effects being an increase in liabilities as well as administration costs. Some reports put the potential cost at £10 billion or more. Should the costs to UK schemes be sufficient as to be considered not objectively justified, a challenge to equalisation under Article 14 of the European Convention on Human Rights may transpire. In the meantime, schemes should ensure that all data is as up to date and accurate as possible as it will have to hold up to the scrutiny following whatever method of equalisation is adopted should the government plans go ahead. Seeking related scheme-specific legal advice is also likely to be necessary.

Anderson Strathern’s Employment and Pensions Unit can help by advising you of the likely impact these changes will bring and provide expert scheme-specific advice on how to meet your obligations in the most commercially efficient way.

For more information please contact our Head of Pensions Steven Dunn.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.