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Guaranteed minimum pensions (GMP) issues again

Technical Article

Publication date:

09 November 2018

Last updated:

15 March 2019


Claire Trott

Guaranteed minimum pensions accrued between 6 April 1978 and 5 April 1997 but the way in which the benefits were structured, accrued and paid has been a burden to all defined benefit contracted out schemes since 1990. The issue stems from a judgement often called the Barber Judgement. In this ruling the Court of Justice of the European Union on 17 May 1990 ruled that pension benefits should be equal but GMP benefits we left to flounder as there was no clear direction as to how this should be achieved. GMP benefits are provided to employees who were contracted out of the state earnings-related pension scheme (SERPS) and payable at 60 for women and 65 for men.

We all know that the Government is in the process of equalising male and female retirement age but has not yet legislated to equalise treatment in relation to GMPs state benefits. This is mainly because of the complexities involved. Females accrued GMP benefits quicker and they were payable at an earlier age. However, as the benefits in payment increased at a different rate to benefits in excess of the GMP there isn’t a clear male or female winner, so equalisation is very complex to ensure no one is penalised. For schemes that continued to be contracted out on a salary related basis after the Barber Judgement there are still many outstanding issues and the recent case discussed below may help deal with some of them, although it isn’t an outright answer.

The recent case of Lloyds Banking Group Pension Trustees limited v Lloyds Bank and others 2018 EWHC 2839 has confirmed that Trustees have a legal obligation to equalise GMP benefits.

The Department for Work and Pensions (DWP), published a draft methodology for equalising GMPs in late 2016, based on a one-off calculation for each female scheme member whose benefits were lower than an equivalent male scheme member they should have been. However, it has held off from finalising its plans, which it is now likely to revise in light of the High Court judgment.

The current case was brought by the Lloyds Bank pension schemes trustees, which sought a ruling as a because of claims from a number of female members of the schemes. The court was asked to rule on whether there was an obligation to equalise benefits and, if so, what method should be adopted in order to do so and whether there should be any time limits imposed on a member's right to claim in respect of previously underpaid benefits.

Mr Justice Morgan's detailed ruling confirms that trustees are under a legal duty to amend pension schemes in order to equalise benefits for male and female members where the discrepancy is as a result of GMPs. He also ruled that, while employers and trustees have some flexibility when choosing how to do this, the method adopted must not breach the "principle of minimum interference" and so cannot be more generous to members than necessary. This ruled out equalisation methods proposed by both the banks and the scheme members.

The judge ruled that the legal duty to equalise GMPs also extended to schemes being wound-up or entering buy-out transactions. In this "special case", the "commercial imperative" to complete the transaction may justify the use of an equalisation approach which breaches the principle of minimum interference, he said. Any time limits on compensating underpaid members should be governed by the scheme rules in each individual case, although there is no time limit on recovering overpayments from scheme members, he said.

Interestingly the judgment confirmed that equalisation is to be extended to those schemes in wind up or at a buyout stage. There is no mention for retrospective action for those schemes that have since wound up.

There will be a significant impact on pension trustees and their advisers with the need to make decisions about how to deal with the outcome of this judgement. It may well result in the suspension of some transfers while the schemes try to decide on the most appropriate way forward.

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This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.