The Pensions Administration Standards Association (“PASA”) has issued guidance for trustees on equalising benefits to reflect unequal Guaranteed Minimum Pensions (“GMPs”) including “good practice” approaches to deal with a number of common issues not addressed by the High Court in the Lloyds judgment.
The guidance notes that complexities arise from:
- missing or incomplete data,
- the need to identify that part of each member’s benefit relating to the period 17 May 1990 to 5 April 1997 and to construct the benefits that would be payable to an opposite-sex comparator in respect of this period,
- how individual scheme benefit structures treat members’ GMPs and benefits in excess of GMP and
- potential tax implications.
The guidance includes some worked examples to illustrate some of the issues.
Correcting past underpayments
The guidance notes that a scheme’s choice of equalisation method will be influenced by whether there are “crossover members” – members who move during retirement from being disadvantaged relative to an opposite-sex comparator to being advantaged (or vice versa). If there are no crossover members, the methods approved by the High Court all give the same result.
Schemes will need to consider not only pensions currently in payment but also “no further liability” cases, for example members who have transferred out or died with no further benefits payable. However, schemes may wish to apply a de minimis level below which they will not correct benefits for these “no further liability” members. It should be noted also that a further Court case is due to clarify the position around members who have transferred out.
The guidance notes that some trustees and employers may take a commercial decision not to investigate “no further liability” cases, as the relevant data may not exist. It suggests, however, that trustees might consider sending a communication to the members’ last known address.
Equalising future benefit payments
Future payments (to both current and future pensioners) can be corrected using the same, year-by-year approach or by converting GMPs into non-GMP benefits. PASA recommends using unisex factors for conversion, in order not to perpetuate unequal treatment of members.
While it is possible to use different methods for different groups of members, trustees should consider whether it would be possible for a member in one group to claim in the future that the method used to correct his or her benefits was less generous than the method used for other members.
Conversion may be carried out at a member’s retirement (or when benefits otherwise become payable), which avoids assumptions having to be made about the rate of revaluation of non-GMP benefit and about the options the member will choose at retirement.
Transfers in
It will be difficult for trustees to equalise benefits correctly for members who have transferred a GMP into the scheme without more information from the transferring scheme. Such information may be hard to obtain, particularly when the transfer took place many years ago. A Court case due to be heard early in 2020 is expected to cover transfers in; in the meantime PASA suggests that schemes identify members who have had such a transfer, as well as of the transferring scheme in each case, and establish whether any indemnity was provided.