Christopher Stiles
Partner
Article
8
Since the High Court ruled in the Lloyds Bank case in October last year that pension benefits need to be equalised between men and women for the effect of guaranteed minimum pensions (GMPs), most pension scheme trustees have been awaiting guidance from the Department for Work and Pensions (DWP) on how to go about this.
The publication of DWP's guidance on 18 April 2019 is therefore an important development. However, on its own, it does not give pension schemes all the information they need in order to make substantial progress on this issue.
The DWP's guidance contains the following:
The proposed method is broadly the same as that which the DWP put out to consultation in November 2016, although the description of it has been updated to take account of the Lloyds case.
In broad terms, it involves reshaping scheme benefits so that they no longer contain GMPs. For each member, an actuary can put a capital value on his or her pension. If that capital value would have been higher if the member had been of the opposite sex during the period to which GMP equalisation is relevant (17 May 1990 to 5 April 1997), then that higher value is used.
That capital value is then converted back into a pension, but of a different design which does not include a GMP.
More detail on the DWP's method is available in the first part of this Insight - DWP publishes guidance on GMP conversion: what does this mean for trustees and employers.
The judge in Lloyds set out a default method for equalising GMPs, which he called "Method C2". For those who are familiar with Lloyds jargon, the DWP method is equivalent to Method D2. Unlike Method C2, it can only be adopted with employer agreement.
Method C2 involves adjusting the pension continually throughout the time when it is in payment, to ensure that the amount received by the member is no less than they would have received if they had been of the opposite sex during the period from 17 May 1990 to 5 April 1997. The DWP method, with its use of conversion, avoids that complexity, because it is a one-off adjustment to benefits. However it achieves that simplicity at the cost of doing greater violence to the original benefit design that members were promised.
Although it will not be the right solution for everyone, we expect the DWP's method to be popular with many schemes and employers, because it avoids the complexities and costs of operating Method C2. The nature of the reshaping of the benefit under the DWP's method is therefore an important decision for trustees, on which legal advice will be required. Trustees will need assurance that whatever reshaping they adopt is consistent with their legal duties and safe from member challenge.
GMP conversion also creates possible opportunities to reshape benefits in a manner which facilitates the scheme's objectives more generally - again, schemes will need legal and actuarial advice on this.
Schemes which have a pressing reason to equalise GMPs now (for example, because they are in the process of securing benefits with an insurer) should take actuarial and legal advice on whether the DWP method is suitable and how to go about implementing it.
For schemes that do not have a pressing reason, however, it would make sense to await further developments, for the following reasons.
Even if it is too soon for most schemes to begin converting GMPs, it does not follow that there is nothing that should be done now. We suggest the following actions which will be appropriate for most schemes.
NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.