Consulting Actuaries

GMP conundrum...not quite solved

Royal London Consulting Actuaries

22 November 2018

The High Court recently handed down its judgement in an important pensions case (Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank plc and others), concluding that trustees must adjust scheme benefits for sex-equalisation of Guaranteed Minimum Pensions (GMPs).

The judgement has provided clarity on some issues, but many questions remain.

In a nutshell

The Court has decided that:

  • Trustees must adjust scheme benefits for the effect of sex-unequal GMPs.
  • A number of different methods of equalising for GMPs are allowed, but the employer can force the trustees to adopt a particular approach (Method C - see below for details).
  • Trustees cannot impose a more generous equalisation approach without the employer’s agreement.
  • Trustees are obliged to make back payments. Depending on the scheme rules this could be back to 17 May 1990 or just limited to 6 years (the Lloyds situation).
  • Simple interest must be paid on back payments at 1% p.a. above base rate.

Why do GMPs cause inequalities?

More information about GMPS can be found at the end of this article.

 GMP legislation stipulates that:

  •  Male GMPs are payable from age 65, but from 60 for women.
  • Female GMPs accrued faster than for men due to the shorter period to retirement.
  • Different increases apply to/from these different ages.

Typically it means males are disadvantaged compared to females from a GMP perspective. However, when considering the whole scheme benefit this may not always be true. Depending on the scheme rules, the “advantage” can swing between the two sexes over time. There is no simple way to determine who is better off, or by how much. 

Proposed methods for equalising benefits

The court considered four methods for equalising GMPs, together with some variants on each theme. In summary, the methods considered were as follows:

Method A:

Equalise each unequal element of pension separately year on year. The equalised elements are then added together to determine the pension payable.

Judgement : Not appropriate.

On an annual basis, each element of the pension calculation is considered separately and adjusted to remove any inequality in that element of pension. This method is the most complex administratively and the most costly. In the Lloyds case the judge disregarded this method as it conflicted with the ‘principle of minimum interference’ from the Banks’ perspective.

Method B:

Calculate and pay the higher of the total male and female pension each year.

Judgement : Possible.

On an annual basis, a comparison is made between the member’s actual benefits and what he/she would have received were they of the opposite sex. The greater of the two calculations is then paid to the member. Unlike Method A, this is not an element by element calculation, but involves a comparison at total pension level. This is the method proposed by the DWP in 2012, which was criticised by the pensions industry for being too complex and too expensive!

Method C:

Provide higher of total male and female pension each year, subject to accumulated offsetting.

Judgement : Possible.

Uses the same initial calculations as Method B, but aims to address some of its perceived drawbacks. It’s designed to equalise cumulative pension paid and not the pension paid each year. This avoids overcompensating members. So, if the annual calculation reveals that the previously advantaged sex has now become the disadvantaged one, instead of applying an automatic increase to the now disadvantaged sex, the lower of the two calculations is paid until such time as the accumulated excess prior to the switch equals the accumulated loss after the switch.

As a variation of the above, Method C2 uses the same calculation except that the accumulation allows for interest. In the Lloyds case the judge favoured Method C2 as the least expensive option.

Note: Method C and its variants may be very complicated to administer and so may not be the least expensive option once extra future administration costs are factored in.

Method D:

A one-off actuarial equivalence calculation - a variant is to then convert GMP into ordinary scheme benefits.

Judgement : Not appropriate.

This involves a one-off actuarial calculation. For each member the value of future rights to benefits is compared to the value of future rights were he/she to be of the opposite sex. If the value of opposite sex rights is higher, then the difference is paid as additional pension.  In the Lloyds case the judge disregarded this method as it conflicted with the ‘principle of minimum interference’ from the beneficiaries’ perspective.

As a variation of the above, the judge noted that using Method D after achieving equalisation via Method B or C would be lawful - Method D2. Judgement : Possible. This method is similar to that proposed by the DWP in 2016. Future administration is easiest under this method.


Hold tight - Don't panic

Trustees do now know one thing; they must adjust benefits to allow for GMP inequalities. However this is arguably no different from views generally held prior to the judgement.

There is still a lot of uncertainty, so it may be beneficial for trustees to await further developments:

  • There is still no single method to achieve GMP equalisation.
  • The DWP is expected to finalise its guidance on its preferred methodology shortly. It would seem sensible to await publication of this document.
  • The DWP has indicated that it will legislate to make it easier to convert GMP into ordinary scheme benefits. Again it would seem sensible to await publication of these regulations. 
  • The judgement may be appealed and/or subject to secondary judgements.
  • There are also a number of areas not addressed by the judgement. For instance, how should very small additional benefit be dealt with? Are previous transfer values paid out affected?

The key message is don’t panic. The GMP saga is likely to run for many months, and probably years, yet!

What could you do?

Trustees and employers should consider the following actions:

  • Identify which non-retired members have GMPs accrued between 1990 and 1997.
  • Decide what to do for transfers out and retirements in the immediate future. We believe that schemes should continue to provide quotes and benefits as they have been doing in recent years. However trustees should try to ensure that members and their financial advisers understand that any figures do not allow for the consequences, if any, that may arise following the Lloyds judgement.
  • Obtain legal advice on the implications for their scheme allowing for their specific scheme rules; bearing in mind the known unknowns.
  • Identify which retired members, have GMPs accrued between 1990 and 1997.
  • Decide whether to write to relevant pensioners now about the case or to await further clarity from the DWP.
  • It is likely that auditors will require employers to make an allowance for any impact in their next set of company accounts. The cost would need to be recognised through the P&L, so could have a material impact on profits. Employers should speak to their auditor prior to their year-end.

Contact us to find out more. 



    The history of GMPs 

    What are GMPs?

    GMPs were earned in contracted out schemes between 1978 and 1997. During this time:

    • Employers and employees paid reduced National Insurance Contributions.
    • The employee gave up their state earnings related pension.
    • The scheme had to provide a pension at least as good as a statutory minimum, called the GMP. The GMP is a part of a member’s scheme pension entitlement.

    GMPs are defined in UK legislation and are inherently unequal. They accrued at different rates for men and women and are payable from different ages (65 for men and 60 for women). They also have different inflation protections from ordinary scheme pension.

    The GMP story so far

    The European Court Judgement on 17 May 1990 (the Barber judgement) ruled that pension schemes must treat men and women equally, but that state pensions were exempt. Pension schemes took action typically equalising retirement ages at 65, and adjusted the benefits. However, as GMPs were set by legislation to mirror state pension benefits, it has always been unclear whether the Barber judgement applies to GMPs.

    The Government did nothing at all about GMPs for a further 7 years until they ceased to accrue in 1997. Then in 2010, they stated their view that the Barber judgement does apply to GMPs. However there is no tried and tested approach for equalising pensions for the effect of inequalities caused by GMPs.

    The DWP proposed an approach in 2012. This involved making year on year comparisons of male and female benefits, with the member being paid the higher of the two amounts. This was heavily criticised by the pensions industry as complex and expensive.

    After years of radio silence, the DWP tried again in 2016. This time proposing a one-off calculation comparing the actuarial value of the benefits of a man and a woman, with the greater of the two values then being converted into ordinary scheme benefits under the GMP conversion regulations. The DWP made it clear that trustees would not be obliged to use this method.

    The DWP has undertaken further work, but held off finalising its position pending the outcome of the Lloyds case.