GMP Equalisation Consultation: Sackers Response

Background

The DWP’s consultation on equalising groups includes regulations and a possible equalisation method which propose changes to the Equality Act 2010 and the Pensions Act 2004 (the Acts) to remove the requirement for a comparator in relation to GMPs.  Alongside the draft regulations, a possible method for equalising pension scheme benefits “for the effect of” GMPs is put forward by the DWP.  In our view, legislating for the effect of GMPs is not appropriate.

In this response:

• Why GMP equalisation is not required
  
• Requirement for a comparator
  
• Draft legislation on the requirement to equalise
  
• The DWP’s “possible method” for equalisation
  
• Other Options
  
• Cost of equalising GMPs: Impact assessment
  

Why GMP equalisation is not required

GMPs are replacement state benefits

GMPs are designed to provide benefits that would otherwise be provided by the state.  These state benefits are themselves different for men and women.  While equalisation of state pension ages between men and women is underway, there is no intention to alter state benefits retrospectively and the historical rules remain unequal.  Given that GMPs are in line with the applicable state benefits, we do not consider there to be justification for more onerous requirements to apply to GMPs than to the state benefits which they replace.

EU Equal pay legislation

We understand from the consultation that the Government’s view is that contracted-out schemes which hold GMP liabilities are already under an obligation to “equalise pensions for the effect of the GMP rules for any accruals from 17 May 1990 to 5 April 1997 (inclusive), apart from where the limited exceptions in the Equality Act 2010 (Sex Equality Rule)(Exceptions) Regulations 2010 apply.”

We note that, under Article 157 of the Treaty on the Functioning of the European Union, EU Member States are subject to the principle of equal pay for equal work between men and women.  The Barber case established that pensions are “pay” for the purposes Article 157 and so are subject to that principle.  However, as noted above, GMPs are in effect state benefits and, as such, they are not “pay” for the purposes of Article 157.  We therefore do not agree with the DWP’s view that schemes are already subject to a requirement to equalise pensions for the effect of GMPs.

This view is supported by existing CJEU case law, Hlozek v Roche Austria[2005] 58 PBLR, following Birds Eye Walls Ltd v Roberts [1993] PLR 323, which has held that occupational pension benefits that are designed to integrate with state benefits are not discriminatory.  It is therefore reasonable to draw the analogy here that benefits such as GMPs, which would otherwise be provided by the state, are also not discriminatory.

GMPs are not an independent benefit

In practice, as the GMP element of an individual’s pension benefit operates as an underpin, it is not an independent part of the benefit.  As such, a separate requirement to equalise that part of the benefit is not required.

Pensions industry practice

In the absence to date of any specific requirement in UK law to equalise benefits for the effect of GMPs, the prevailing view of the pensions industry has been that there is no clear obligation on trustees to equalise benefits where inequalities arise only from the impact of the contracting-out legislation (including TPR’s predecessor, OPRA, in its Update 3 on winding-up published in August 2003).

It would aid the industry’s general understanding of the DWP’s position, if the DWP were able to release the legal advice it has received on this issue which has led to its view that GMP equalisation is required.

As noted above, our view is that equalisation of GMPs is not required.  However, should the Government proceed with implementation of the present proposals we have a number of comments on the proposed approach.

Requirement for a comparator

The consultation considers whether or not there needs to be a “comparator”, i.e. a scheme member of the opposite sex who is being treated more favourably, in order for a member to assert that there has been unequal treatment.   The DWP’s view is that the CJEU decision in Allonby means that “as inequality resulting from the GMP rules results from state legislation, the requirement to remove any unfavourable treatment resulting from those rules is not subject to the requirement that an opposite sex comparator exists”.  As such, the DWP considers that schemes should assume that a comparator exists for the purpose of equalising GMPs.

As the Allonby case concerned discrimination in relation to access to benefits (as opposed to the calculation of benefits), we take the view that Allonby is not relevant to the issue of whether the resulting effect of GMPs on scheme benefits is discriminatory under Article 157.  By contrast, in the Coloroll case, the CJEU indicated that an actual comparator was required for a claim to be brought, rather than the hypothetical comparator which the DWP now suggests is sufficient.  The CJEU in Allonby did not criticise the conclusions of theColoroll decision.

We also consider that the DWP’s approach ignores other aspects of the judgment which are relevant here.  The scheme at issue in Allonby was a statutory occupational pension scheme, the rules of which are set out in legislation.  It was therefore up to the state to remedy the inequalities relating to access by overriding this legislation (and the lack of a comparator was no defence to the state perpetuating the discrimination).

Draft legislation on the requirement to equalise

In our view, the draft legislation contains a requirement to equalise GMPs.  This means that there is a conflict between the consultation proposal and the draft legislation.  While the consultation proposes the removal of the requirement to find an opposite sex comparator from the Acts, the draft regulations go further than this.  As drafted, the regulations extend the implied equal treatment rule to GMPs and, as a result, put trustees under a separate obligation to equalise benefits for the effect of unequal GMPs.

Generally there is a presumption against making retrospective changes to legislation.  Legislation should only be retrospective to the extent absolutely necessary to achieve the policy objective and provided there is no detriment to members.  In this case, the effect of the change is to amend historical benefits which stopped accruing nearly 15 years ago.

The DWP seeks to use the power under section 2(2)(b) of the European Communities Act 1972 (ECA) to amend the Acts by regulation to implement an EU obligation.  However, this provision is subject to the protections set out in Schedule 2 to the ECA, which include the requirement that regulations made under section 2(2) shall not include a power “to make any provision taking effect from a date earlier than that of the making of the instrument containing the provision”.
We therefore ask the DWP to confirm:

• its power to amend the Acts in this way; and
• as the draft regulations relate to benefits accrued between 17 May 1990 and 5 April 1997, whether the proposed changes are intended to take effect from a date earlier than the regulations.

The DWP’s “possible method” for equalisation

The DWP’s “possible method” for equalising benefits for the effect of GMPs relies on a comparison between a member’s GMP (under the scheme rules and the relevant legislation) and their GMP had they been of the opposite sex.  Each year, the scheme would then pay the member the higher of:

• the amount they would receive under the scheme rules; and
• the amount they would have received under the rules were they of the opposite sex.

In addition, schemes would need to address the date on which benefits come into payment.  If a member would have been entitled to their pension earlier had they been a member of the opposite sex then the pension “should be put into payment at that earlier age”.

We understand that it is not proposed that the method put forward by the DWP should be the sole method for equalising GMPs.  The DWP does not intend that its method should constitute “legal advice to schemes on how to equalise, or be a definitive statement on how to equalise”.

However, if the Government’s policy intention is that schemes should equalise GMPs, the lack of a definitive method for GMP equalisation could cause difficulties.  There are currently differing views within the pensions industry as to how GMP equalisation could be achieved (in the event that it is required).  Without definitive guidance, any schemes which equalise GMPs in reliance on solutions other than the DWP’s “possible method” risk future claims from members that an appropriate equalisation method was not selected.

If published in final form, the DWP’s “possible method” will be viewed as a Government approved method for equalising GMPs – whether or not that method is correct or required.  But in our view, this is something which can only be assessed by the courts.  At present, there is no clear evidence to suggest that the CJEU would support the view that GMPs, being replacement state benefits, need to be equalised.

Schemes adopting the DWP’s proposed method will spend many millions of pounds implementing a method which may later be demonstrated to be incorrect or unnecessary.  This does not appear to be a sensible use of limited scheme resources.

Other Options

Test case?

We are therefore disappointed that the DWP has decided not to sponsor a test case.  As with Barber, a definitive methodology for equalising pension benefits only emerged in the wake of Coloroll and subsequent cases.  In our view, a test case is the only means to establish conclusively whether there is an obligation on schemes to equalise for the effect of any inequality resulting from the GMP rules and, if so, how it should be achieved.

Without such a test case, it is unclear whether the DWP’s suggested legislative changes are required.  Instead, the proposals prejudge a decision of the CJEU on this subject and, as such, when combined with the possible method, amount to unnecessary gold-plating of benefits.

The PPF’s approach

The PPF confirmed its approach on the equalisation of GMPs in November 2011.  In contrast to the DWP’s proposed equalisation method which requires an annual calculation, for the purposes of PPF and Financial Assistance Scheme compensation there is one crystallisation date at which a member’s GMP is assessed.  Requiring only one such calculation at the point when benefits crystallise is clearly an administratively simpler (and cheaper) mechanism to operate.

It is unhelpful that the DWP’s chosen method does not match the method of equalisation chosen by the PPF as it could lead to a divergence of opinion in the industry as to the correct method.

In particular, schemes which enter a PPF assessment period could be required to equalise according to the PPF method.  If the scheme is then rescued and comes out of the assessment period, it may be deemed necessary to revisit the equalisation of GMPs, this time using the DWP method.  This could disproportionately affect those schemes least able to afford it.

Overall scheme benefit

A different method for dealing with the GMP would be to regard the GMP underpin as an integral part of the overall scheme benefit, rather than the replacement state benefit in isolation.  As such, it is the overall benefit in a scheme that would be equalised, without requiring a separate calculation for the GMP element of the benefit, subject to the underpin.  (With regard to the underpin, we note that the DWP’s proposed methodology does not explain how the GMP underpin should be assessed, even where there is significant headroom above the GMP benefit.)

Anti-franking

The anti-franking rules present a major obstacle to schemes considering equalising GMPs on any basis.  The Government recently announced that it is intending to hold a “red tape challenge” in a bid to deregulate and help reinvigorate occupational pension schemes.  Given the current consultation, we believe that the abolition of anti-franking would be a useful starting point.

State buy-back

In order to assist schemes grappling with unequal GMPs, the Government could consider reintroducing the facility to allow contracted-out pension schemes to ‘buy back’ their members’ rights into the State Second Pension.  This option was put forward as part of the Deregulatory Review but dismissed at the time, in part due to the then forthcoming introduction of legislation to convert GMPs into scheme benefits (see further 6.2 below).  However, given the low take-up of GMP conversion, this may be a feasible alternative to the current GMP equalisation proposals, having advantages of certainty and clarity for schemes and their members.

Conversion of GMPs to scheme benefits

The option to convert GMP benefits into ordinary scheme benefits was introduced in April 2009.  However, in our experience, this facility is rarely used (except occasionally for schemes in wind-up).

One reason for the low take-up of the facility is that strict conditions need to be complied with before GMP conversion can be achieved.  For example, there is a requirement for the same survivors’ benefits to be attached to the post-conversion benefits as were attached to the GMP.  This is quite different to the position for protected rights which, from April 2012, will generally be converted to scheme benefits and existing statutory protections ended.

Allowing conversion of GMPs into ordinary scheme benefits (which would be subject to the normal requirements of discrimination legislation) using a simplified procedure with no requirement for tracking survivors’ benefits, could be a viable alternative to the costly process of equalising GMPs.

Abolition of GMPs

Another alternative would be for the Government to legislate for the abolition of GMPs.  This suggestion was put forward in the 2011 Budget, in connection with the possible introduction of a single tier state pension, and further examined in the DWP’s 2011 consultation: “A state pension for the 21st Century“.  We understand from the 2012 Budget that plans for a single tier state pension will go ahead.

In the same way that protected rights are being abolished from 6 April 2012, a similar approach could be taken in respect of GMPs, ultimately turning them into ordinary scheme benefits.  Such an approach is likely to be far simpler for schemes to administer, compared with the GMP equalisation proposals.  In addition, it is consistent with the Government’s existing approach in relation to DC contracted-out benefits.

Whilst the abolition of contracting-out in DB schemes remains a live issue, any pursuance of proposals to equalise GMPs should, at the very least, be put on hold.

Cost of equalising GMPs: Impact assessment

It is not clear that the Government has fully considered the likely impact of its proposals on pension schemes and their sponsoring employers.  If a requirement is imposed on pension schemes to equalise benefits for the effect of GMPs, this will inevitably result in significant additional costs for schemes.  By contrast, the benefit to pension scheme members may, in many cases, be minimal.  A full impact assessment is needed to enable the pensions industry and Government to assess the likely costs of any such requirement to equalise GMPs.

In particular, the Government may wish to conduct a Call for Evidence in order to identify the scale of the likely impact.  In the private sector, a large proportion of schemes hold GMPs as a separate benefit, which we understand is not the case in the public sector.  Our understanding of the public sector is that only one scheme makes the distinction between the GMP and the excess over the GMP.  Where no distinction is made, the job of equalising GMPs is both easier and cheaper as the whole benefit is equalised, not the separate elements (including attached revaluation and indexation).

Given that GMP equalisation would require schemes to look back at benefits accrued between 17 May 1990 and 5 April 1997, account would need to be taken of:

• administration costs: systems would need to be modified to ensure that benefits accrued during this period can be separately identified and computed;
• actuarial fees: resulting from the (generally annual) benefit comparison;
• other professional fees: for advice on how to achieve equalisation in the absence of an ECJ determination on this;
• past transfers and mergers: these would need to be reviewed to ascertain what protections were agreed between the transferring and receiving schemes in relation to GMP equalisation;
• current tax legislation: this would need to be considered for both current and future pensioners.  Where payments need to be increased as a result of any GMP equalisation exercise, the authorised payments regime will need to be updated to permit this.  In addition, account will also need to be taken of the impact of the reduced annual allowance; and
• past rebates to pension schemes: these have been paid on an unequal basis in respect of men and women.  How does the Government envisage that these should be accounted for?

Requiring schemes to equalise GMPs may result in more schemes seeking to enter the PPF.  This is for two reasons:

• given the likely significant additional costs for schemes and their sponsoring employers associated with GMP equalisation, there is a real risk of a greater number of employer insolvencies; and
• as any GMP equalisation exercise would exclusively benefit those members with pre-1997 service who are older (and who may already have reached normal retirement age (NRA)) this is likely to increase the PPF liabilities in the Scheme as it is the post-NRA members who will have a larger proportion of their benefits protected by the PPF.

There will also be consequential costs and complications for schemes seeking to de-risk.  Although allowance for GMP equalisation is generally already made in the pricing of buy-in and buy-out contracts, to date this has not necessarily been done on the basis of the DWP’s possible method.

Finally, taking account of the current market conditions (which are having a significant adverse effect on occupational DB schemes), as well as the length of time since the Barber decision, in our view the Government’s decision to act on this issue now is likely to damage further the Government’s stated aim of fostering a culture of pension saving.