Implementation of Lloyds GMP ruling will be ‘simpler than it looks’

James Phillips reports...

The High Court ruling on guaranteed minimum pension (GMP) equalisation may have said various methods were possible but, in practice, schemes will find it fairly easy to implement, legal experts say.

In a landmark decision last week, the High Court ruled in the Lloyds case – saying pensions provided to members who had contracted-out of their scheme must be recalculated to ensure payments reflect the equalisation of normal retirement ages in the 1990s.

Most schemes will be able to, and want to, adopt the same approach as is most likely to be chosen by Lloyds and its schemes, method C2 – where the accumulated GMPs paid to men and women are compared on an annual basis, with interest applied.

This is despite the court ruling other options were possible, including option D, where an actuary would calculate the prospective value to be paid between the calculation date and a members’ estimated death, with the scheme then paying the higher.

Arc Pensions Law senior partner Anna Rogers said the judge arrived at a “clever result”, providing a simple and low-cost route for equalising benefits, with a nod to the “principle of minimum interference”.

“There is only really one way of doing it,” she said. “There’s only one way that both the employer and the trustees can insist on. The employers can insist on the lowest cost way of doing it and the trustees can insist that they obviously have to do it, and those only converge on the one method.”

Method C is considered the least costly option as the “crossover date” – where the cumulative amount of a man’s GMP overtakes that of a woman’s – was estimated, for Lloyds, to be at age 91.

Sackers partner Faith Dickson agreed, noting “there is bound to be some debate” but the judge had given a “fairly strong steer” towards method C2.

“A lot of GMP rules are generally written in the same way and schemes to have to have in them an equality rule,” she said. “If all else failed, and employers and trustees couldn’t agree [on the method to use] the trustees would probably ultimately have the power to do it.”

But Burges Salmon partner Richard Pettit is not convinced, believing that a number of schemes may want to seek additional guidance from the courts, arguing “the Lloyds case is not the end of the line on this.”

Ongoing lottery

In some respects, it is similar to the ongoing lottery over whether schemes can change the indexation method used for uprating benefits.

Pettit said: “We expect to see a number of cases reach the courts over the next few years as schemes look to get clarity on the position under their particular rules and to further explore some of the wider legal issues – for example, whether the range of methodologies might be further limited in certain circumstances.”

Dickson said the likelihood of this happening for GMPs was significantly lower, however, and would probably happen most commonly where trustees and employers disagree on the approach.

“There might be some disagreements sufficient between employers and trustees that they might go to court to bless a particular way,” she said, particularly if trustees are “feeling very pressured” by their scheme sponsor to go one particular way.

But, in terms of a lottery, Dickson said this would be more squarely on the impact side of things.