Defined Benefit  

Public schemes safe from pension equalisation debacle

Public schemes safe from pension equalisation debacle

Public sector pensions schemes won't have to change the way they equalise guaranteed minimum pension (GMP) benefits, despite a new court ruling on this issue.

Defined benefit (DB) scheme members who contracted out are set to receive millions of pounds in back payments after a landmark ruling in a case brought by the trustees of Lloyds Bank's DB schemes this summer.

Justice Morgan ruled trustees must equalise benefits between women and men who have GMPs as a result of contracted out benefits.

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Some pension administrators are already advising schemes to halt pension transfers because of the ruling but the case doesn’t have an effect on public schemes.

An HM Treasury spokesman said: "Public sector schemes already have a method to equalise guaranteed minimum pension benefits, which is why we will not have to change our method as a result of this judgment."

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.

But in the Barber ruling in 1990, the European Court of Justice said occupational schemes were considered a form of deferred pay and differences in benefits for men and women were unlawful.

Kate Payne, partner at law firm ARC, said the Treasury's assertion was likely due to a consultation which closed in January this year, which announced that the government will extend its current interim solution for ensuring equalisation and indexation of GMPs for those who reach state pension age on or before 5 April 2021.

According to estimates from the Government Actuary’s Department, this will cost public schemes around £5bn.

Ms Payne said: "A number of options were considered, including the 'case-by-case' basis, full indexation and conversion. The government believes conversion may be the better option, subject to further consideration of methodology and any legislative changes that might be required."

This method would mean that the GMP benefit would be converted into a normal scheme benefit.

In the consultation, the government said it would use the time of the extension to consider the adoption of conversion, which has a similar cost to expanding the interim solution.

Both Treasury and the Department for Work and Pensions were interested parties in the Lloyds case.

Ms Payne said the DWP joined "because there were questions around the drafting of the current conversion legislation".

She said: "The court found that the current provisions in The Pension Schemes Act 1993 did enable conversion for 'earners' as well as 'survivors'. HMT were interested in the methodology and conversion, given their preferred long term solution for public service pension schemes, as well as the issues around back payments.