In a landmark decision which will impact most defined benefit (DB) pension schemes, the High Court held on 26 October 2018 that pension schemes must equalise for the effect of guaranteed minimum pensions (GMPs) providing different benefits for men and women.  The costs and administration involved in doing so will be substantial.

However, pension scheme trustees and sponsoring employers should not feel pressured into trying to equalise immediately.  Getting to this point has taken over 25 years and there are no prizes for first being the first to implement the decision. Analysis and processing of the implications for each individual scheme will take time – for larger schemes probably more than a year.

We suggest you:

Links to all these can be found at the left side of this alerter.  Our 8-point GMP Equalisation Plan is also set out below.​

1. Reconcile GMPs: schemes need to finalise the reconciliation of their GMPs with HMRC before they can start equalising for the effect of GMPs.  Most schemes are nearing completion of this project, but so far few have adjusted members' benefits.  We recommend that trustees complete the reconciliation of their GMP records but hold off rectifying any mismatches in benefits, pending finalisation of both their reconciliation and equalisation projects. 

2. Stop the clock: check whether your scheme rules contain an express six year limitation rule (so that benefits which fell due more than six years previously may not be payable) and whether this limitation is mandatory or discretionary.   Where there is an express limitation provision, trustees should consider agreeing with their sponsoring employer to "stop the clock" now so that members will not be disadvantaged by any delay in implementing GMP equalisation.

3. Communicate with members: your members may have seen reports in the press of pension "windfalls" arising from the High Court decision.  In reality, most adjustments to benefits will be very small (although the implementation costs may be significant).  Consider a short communication to members reporting that you are reviewing the implications of the decision for your scheme but that any increases to benefits are likely to be very modest.

4.  Payment of transfers: ask your actuary to assess whether cash equivalent transfer values (CETVs) should be adjusted to reflect the obligation to equalise GMPs, or whether the current factors have sufficient flexibility in them.  You may want to consider suspending payment of CETVs for a limited period (although you can't suspend past the statutory deadlines).

5. Accounting implications: sponsoring employers may be required by their auditors to include provision for GMP equalisation in their company accounts. Likewise, trustees currently undergoing triennial valuations should consider including a provision to reflect the need to equalise GMPs.

6. Investigate offsetting ("franking") benefits where possible: a principal cause of GMP inequality is the complex "anti-franking" legislation, designed to protect deferred members' rights to benefits in excess of the GMP.  Some franking is permitted – but administrators do not always frank revaluation of GMPs against pension increases to the maximum extent allowed. Check your administrator's practice against the anti-franking rules, as maximum use of franking could go a long way to reducing the cost of equalising GMPs.

7. Prepare your data:  historic data will be needed for a GMP equalisation process. For many schemes, this data may no longer be available and approximations will be needed.  Trustees should work with their administrator to identify where there are gaps and to work out how these can be filled.

8. Wait: the Department for Work and Pensions (DWP) is expected to reconvene the pension industry GMP working group (in which Hogan Lovells has participated) and to produce guidance on how GMP conversion legislation could be used to equalise benefits on a “once and for all” basis.  Equalising GMPs through conversion would avoid the ongoing administration cost of running dual pension payroll records which other equalisation methods would involve.  Additionally, it is possible that some/all of the judgment may be appealed, and there may be another court hearing to deal with some of the ancillary issues which were not asked in the main hearing.

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