"Schemes do have to equalise the effect of GMPS and there is a range of permissible methods but the key is “minimum interference”"
Guaranteed minimum pensions (GMP) ran between 1978 and 1997 and was intended to match SERPS, the state earnings-related pension which many employees contracted out of.
During the early 1990s, equalisation was carried out for the majority of pension benefits, however GMPs were largely excluded from the process due to a lack of clarity on how it should be applied.
Earlier this year, three female members of the Lloyds Banking Group pension schemes took the Bank to court, claiming discrimination because their GMPs increased at a lower rate than male members.
Following the Court's decision today, pensions provided to members who had contracted out of their scheme must be recalculated to reflect the equalisation of state pension ages in the 1990s.
It is now expected that thousands of DB schemes will need to amend their scheme rules and equalise guaranteed minimum pensions between men and women, with costs estimated to total £20bn.
The ruling is expected to cost Lloyds around £100m-£150m, and it was initially estimated that the cost of equalising GMP could reach up to £500m.
In a statement, Lloyds said: “The hearing focused on what is a complex and longstanding industry-wide issue. The group welcomes the decision made by the court and the clarity it provides. The group and the pension scheme trustee will be working through the details in order to implement the court’s decision.”
Anna Rogers, partner at ARC Pensions Law, commented: "Schemes do have to equalise the effect of GMPS and there is a range of permissible methods but the key is “minimum interference” from the employer’s point of view. This seems a fair way to strike a balance between members and employers given that it’s nobody’s fault that this issue has been dragging on for so long.
"Schemes also have to pay interest on arrears which is important given that the relevant service dates back over 20 years."
Lorraine Harper, vice president of the PMI and director at JLT Employee Benefits, said: “This ruling will be welcomed by many, however, how this translates into a successful and timely remedy remains to be seen. It’s a hugely long and complex task and there will be major implications for DB pension schemes across the private and public sector swallowing the £20bn estimated cost of equalising Guaranteed Minimum Pensions across all contracted out schemes. Indeed, the final reckoning may be significantly in excess of this given that of the four methods considered for equalisation, the one that was perhaps favoured by most has been rejected in favour of a more complicated approach which will inevitably increase the cost of administration.
“Many other schemes will have been watching this case with a mix of interest and concern, but who will pick up the bill ultimately to administer the correction? Will it put pressure on covenants and create added tensions between schemes and their sponsors? All of these questions remain.”
Simon Evans, employment legal director at DLA Piper, added: "At long last, today's judgment appears to give much needed clarity to the thorny question of whether GMPs should be 'equalised' (they should) and adds helpful guidance about the tricky questions of 'how to' equalise future payments and what to do about underpaid past payments. We now know that underpaid unequalised benefits must be 'back paid' (with interest) but how far back remains unclear, except to say that there may be a strong case to limit back-payments to 6 years.
“There will of course still be detailed work ahead to implement equalisations up and down the country. A final thought might perhaps be spared for those schemes that have been terminated and bought out with an insurer without a sufficient (or any) equalisation process having been applied, as to which further thought will be needed in relation to whether such cases now need to be re-opened."
