On the 26th of October 2018, the High Court ruled that guaranteed minimum pension (GMP) benefits should be equal for males and females. Overall, this has impacted around 80% of the defined benefit pension schemes in the UK.
In the ruling, the High Court decided that Lloyds bank should compensate women who got less than men from their GMP benefits. It is predicted that this could lead to billions of pounds in pension costs for British businesses. But what does GMP equalisation actually mean for your pension, and how will it affect pension schemes as a whole? Continue reading for more information.
What is a Guaranteed Minimum Pension?
In 1978, the government introduced the State Earnings Related Pension Scheme (SERPS) to supplement the basic state pension. At this time, many employers offered generous final salary schemes to their employees. To save themselves money on costs and pension provisions, most companies chose to contract employees out of SERPS.
Contracting out meant that the pension scheme would keep offering the same benefits as before without needing anyone to pay any additional national insurance contributions. In return for contracting out of SERPS, company pension schemes were required to offer a minimum level of pension or GMP. Members of these schemes continued to earn GMP benefits until 1997, when the government changed the rules once more.
The Court Ruling
On the 17th of May 1990, the European Court of Justice decided that pension benefits schemes should be equal for both men and women after this date. However, this decision did not apply to state benefits. As such, this ruling and the legislation outlining how schemes should calculate GMPs meant that benefits continued to be unequal in the UK.
In 2018, three members representing the Lloyds Bank pension schemes brought a case to the High Court. This led to a ruling on the 26th of October 2018 that stated that trustees of pension schemes have a legal duty to remove inequalities that arose from the unequal GMPs. You can find more information about what pension trustees need to know about GMP equalisation in this comprehensive breakdown.
Does GMP Equalisation Affect You?
The first thing to identify when determining the impact of the High Court ruling on your pension is whether you were contracted out of SERPS. If you were, you then need to ascertain whether you were earning GMP in the period between 1990 and 1997. You will only be affected by GMP equalisation if these factors apply to you.
Where Did the Inequality Come From?
The issue with SERPS and GMP benefits was that they did not provide equally for men and women. For women, GMP was payable from the age of 60, whereas this was set at 65 for men. There was also a disparity between the rate at which men and women earned GMP benefits. This difference was because the “working life” for women was five years shorter than for men.
In the majority of cases, there wasn’t actually any inequality since the total pension was higher than the GMP. The issue presents itself due to the rules of many pension schemes about how a pension increases before and after retirement. Effectively, GMP and the rest of the pension increase at different rates.
Because of this, differences begin to show over time. Discrepancies became apparent between the pension payable to men and women on the same scheme. However, men and women are not specifically better or worse off as a result of these differences. Instead, the pension payable is more dependent on the scheme’s rules in particular and the earnings and retirement age of the individuals.
It is a highly complex subject matter, and people may even be better off right now but are projected to lose out in the future. However, since the law now requires eliminating inequalities, eligible people will be paid the higher of the two pensions available. People will either be unaffected by GMP equalisation or will benefit from it – no one will lose out due to the ruling.
How Will Payments be Affected?
If you haven’t retired yet, then the impact of GMP equalisation may just be that you receive a higher pension on retirement. As stated above, you shouldn’t lose any money because of the ruling.
If, however, your pension is already being paid, the situation becomes a bit murkier. If an adjustment is required, it will likely be good news. You might receive a lump sum to cover any historic underpayments. It is still unclear whether people will need to pay those back for overpaid pensions or whether their future payments will be reduced.
On the whole, any adjustment is unlikely to be substantial. GMPs generally make up a small portion of an individual’s pension, and any adjustment to these will be smaller still. The real impact of the ruling is likely to be felt by businesses and pension schemes, which face billions in costs due to GMP equalisation.