Defined benefit (DB) pension scheme members who contracted out are set to receive millions of pounds in back payments, following a ruling in the High Court today.
Handed down today (26 October), the landmark ruling concerns a case brought by the trustees of Lloyds Bank's DB schemes this summer.
Justice Morgan ruled the trustees must equalise benefits between women and men who have guaranteed minimum pensions (GMPs) as a result of contracted out benefits.
The case concerns a pension problem spanning almost three decades and could have widespread implications for hundreds of thousands of pensioners.
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 GMP.
The benefit of contracting out was that both employer and worker saw a reduction in their National Insurance contribution.
The rules for calculating GMPs broadly reflected those for calculating additional state pension benefits. And like state pensions, GMPs were set to different retirement ages for men and women; for men it was age 65 and for women age 60.
In the Barber ruling in 1990, the European Court of Justice had said occupational schemes are considered a form of deferred pay, and differences in benefits for men and women were unlawful.
However since this ruling the government and industry have not been able to reach a conclusion on how to correct this discrepancy.
Today's High Court ruling has now established the method pension schemes should use to equalise benefits – which in the case of Lloyds will have a cost of £100-£150m.
Scheme trustees can use method B – one of the four possible solutions analysed in court – which calculates the member’s pension each year when an increase is due and determines what the pension would be if the member were of the opposite sex; the higher is then paid to the member.
Lloyd’s trustees will have to use method C2, which calculates annual increases in the same way as method B, but instead of automatically paying the higher pension to both members, also takes into account the accumulated value of the pension paid to date.
In this method trustees equalise pension money paid so far, rather than the pension paid each year, which avoids overcompensation.
The judge also ruled arrears of 1 per cent over the Bank of England base rate must be paid.
The scheme trustees said: "The High Court has now made its decision and decided that benefits built up in the schemes between 17 May 1990 and 6 April 1997 should be equalised. We will be working through the details of the court’s decision."
Sir Steve Webb, director of policy at Royal London and former pensions minister, said the ruling was good news but warned implementation could prove complex.
He said: "Schemes will need urgent help from government and regulators to know the best way to respond to this judgment. Members of company schemes could collectively receive a multi-billion pound windfall, but the complexity of making the necessary calculations means that members will not be receiving cheques any time soon."