A recent determination of the Pensions Ombudsman has put the spotlight back on the vexed question of equalisation and Guaranteed Minimum Pensions. In Williamson (H00177) there was a specific complaint that failure to equalise Guaranteed Minimum Pensions had adversely affected a member. The Ombudsman has now decided, after scrutiny of European and domestic law, that GMPs are pay for the purposes of equal treatment and that s62 of the 1995 Pensions Act requires them to be equalised. As the 1995 legislation is overriding, the Ombudsman determined that the scheme had failed to comply properly with the equal treatment rule. He made no specific order, simply directing that the scheme's Trustee and Holding Company should equalise GMPs as soon as reasonably practicable in accordance with the section 62 equal treatment rule.
While the impact of this is that all schemes should be examining their position on equalising GMPs, there is no help available yet as to what action should be taken. The Ombudsman's determination strictly only applies to the case before him and is not the same as a precedent established in the higher courts, furthermore, his determination gives no advice as to how equalisation should be achieved.
The issues that will face schemes are numerous and relate to the period from 17th May 1990 and into the future. Consideration will have to be given to future benefit payments, but there is also the question of how benefits already paid will need to be addressed. One starting point may be to assess the completeness of scheme records. A further area that will become more pressing for many schemes will be the treatment of transfers. Both individual and bulk transfers are potentially affected and consequently there are actuarial as well as legal factors to be considered even by schemes that have already equalised.
It is probable that the pensions industry and the government will have to collaborate to produce a common methodology, as happened following the Barber case.
This is a complex area. Whether or not the Ombudsman is correct in law is still debatable. Under the Pensions Act 1995, there is a timetable for equalising State retirement ages. This introduces progressive increases to female State retirement ages between 2010 and 2020. It would seem inequitable, even absurd, if the public/private partnership that is the UK pensions model allowed the State a further two decades to equalise earnings related pensions while imposing onerous additional costs immediately on the private sector schemes that have helped reduce government expenditure in this area.
From a practical perspective, there is as yet no immediate reason for schemes to embark upon wholesale changes to their current policies. Since the impact upon transfers means that all schemes will have some exposure to this problem, there is a risk that, without a common approach to GMP equalisation, the situation could become even more convoluted. On the other hand, equalisation will not go away.
An appeal has been lodged and we will be watching this closely.
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
For further information please contact Andrew Ashley-Taylor (Pensions), Catherine McKenna (Pensions) Jane Marshall (Pensions).
