The government is understood to be closely watching an upcoming legal case poised to bring an end to a pension problem spanning nearly three decades, which could have widespread implications for hundreds of thousands of pensioners.
The Department for Work and Pensions (DWP) is thought to be considering joining the legal case between Lloyds Bank, the Lloyds Trade Union and the bank's defined benefit pension schemes, which is going to the High Court in July to decide how to deal with unequal payments to people who contracted out of their state pension, after the industry failed to reach a solution.
Between 1978 and 1997, employers sponsoring DB pension schemes could contract their employees out of the additional state pension, as long as the scheme paid a comparable guaranteed minimum pension (GMP).
The benefit of contracting out was that both employer and worker had a reduction in their National Insurance contribution.
Defined benefit (DB) pension members which had contracted out pensions should have had their savings equalised – a move which will benefit mostly women, but also some men.
However, since this decision was taken in 1990 by the European Court of Justice, government and industry haven’t reached a conclusion on how to correct this discrepancy.
Around 2,400 different pension schemes in the UK are affected and correcting it could have an impact of up to £20m for the plans trustees and sponsoring employers.
Now, the Lloyds Trade Union and the bank’s DB schemes are taking this matter to court, so judges can rule if the company needs to equalise pensions, and if so, how should it be done.
Sir Steve Webb, director of policy at Royal London and former pensions minister, said that it is not uncommon for the government to join a legal case if it considers it to be “of strategic importance”.
This happened, for example, in the Walker case – where a gay man has won a landmark court case to secure the same pensions benefits for his husband as a wife would enjoy.
According to James Bingham, associate director at law firm Sackers, “the issues that the court will be asked to consider are relevant to many occupational pension schemes”.
The rules for calculating guaranteed minimum pensions broadly reflected those for calculating additional state pension benefits. Like state pensions, GMPs were set to differing retirement ages for men and women; for men at age 65; for women at age 60.
However, in the Barber ruling in 1990, the European Court of Justice said occupational schemes are considered a form of deferred pay, and differences in benefits paid from pension schemes for men and women are unlawful.
The method for calculating guaranteed minimum pension is set out in legislation. It is possible for the GMP component of a scheme’s benefits to be unequal between the sexes because they accrue at different rates for men and women, they are paid at different ages, and a member’s GMP increases at a different rate from their scheme pension.