Employers will be hit with extra costs as they must reflect the cost of equalising contracted out benefits in their company accounts, XPS Pensions Group warned.
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.
This ruled trustees must equalise benefits between women and men who have guaranteed minimum pensions (GMPs) as a result of contracted out benefits.
According to XPS's research, up to 60 per cent of companies in the FTSE 350 have defined benefit (DB) pension scheme liabilities, and for most these are set to increase following the recent judgment.
The firm said information on this matter was limited but the costs to firms could be in the region of £10bn.
Whilst the trustees of pensions schemes have time on their side to agree a method that satisfies the judgment, sponsoring employers "are on the hook now as the cost of equalising GMP benefits will need to be reflected in companies’ year end accounts," XPS said.
For most this will be in December and need to be accounted for in profit and loss. Many UK employers have only a matter of weeks to decide how to account for GMP equalisation costs and many are still not ready, it warned.
Pensions advisory firm LCP has recently said FTSE 350 companies could suffer a profit hit of up to £15bn, alongside an increase in pension deficit and contributions.
Wayne Segers, principal at XPS Pensions Group, said it was "unwelcome news for employers that they are now forced to quickly calculate the cost of GMP equalisation".
He said: "In order to prevent overestimating in their accounts, employers do need to look at all options available to estimate the cost.
"We are helping our clients do this and are seeing a number of cases where the expected cost is lower than originally thought.
"Our view is if employers embrace this change it is an opportunity for them to ultimately remove their GMPs once and for all and simplify benefits, reducing future administration burden and cost."
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.
However, since the equalisation requirement was handed down by the European Court of Justice in 1990, government and industry have failed to reach a conclusion on how to correct this discrepancy.
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.
maria.espadinha@ft.com
