In the beginning, things were simple
The old state pension was comprised of the Basic State Pension (BSP) and the State Earnings Related Pension Scheme (SERPS). Everyone paying National Insurance Contributions (NICs) at the full rate would build up a BSP. SERPS was a secondary top-up benefit that was based upon earnings.
Many employees opted out – or ‘contracted out’ – of SERPS, either voluntarily or because their pension scheme did so on their behalf. The benefit to the employer was reduced, or redirected NICs, with employees giving up SERPS in exchange for at least as good or, more commonly, a higher scheme pension benefit.
Contracting out was limited to those in defined benefit (DB) or final salary schemes until 1988, when it was extended to members of defined contribution (DC) also known as money purchase occupational schemes and personal pensions. By 1992 more than five million had contracted out of SERPS.
In 2002, SERPS was renamed the State Second Pension (S2P) and contracting out was ended in April 2016, in favour of a single tier state pension.
To account for the benefits of opting out of SERPS, the Guaranteed Minimum Pension (GMP) was created. It was the minimum amount of pension that must be paid by a UK occupational pension scheme to employees who were contracted out of SERPS between 6 April 1978 and 5 April 1997.
What’s the problem?
Everything was fine until the Barber vs Guardian Royal Exchange Assurance Group case went before the European Court of Justice in 1990. Prior to this judgment, it was normal practice for UK occupational pension schemes to have different retirement ages for male and female members; typically 65 for men and 60 for women, which reflected state pension ages.
The ruling determined that from 17 May 1990 – and later clarified in 1994 – that all UK occupational pension schemes were required to pay equal benefits to comparable men and women in relation to their service.
Most schemes equalised pension ages and benefit scales between males and females, but few addressed inequalities arising from the calculation of GMPs based on sex. But it was not clear on how the unequal GMP should be treated. Due to this uncertainty, most schemes did not equalise for the impacts of the GMP element of pension. Instead they chose to only equalise any non-GMP elements.
Going to take it Higher
The government felt the Barber judgment required schemes to equalise GMPs and began consultation on how to achieve this in 2012. There was an impasse on the methodology and the consultation was abandoned in 2013. By 2016, the government was ready for another go and developed what many considered to be an improved methodology.
Uncertainty remained about whether there was a legal requirement to equalise GMPs. So, in 2018, Lloyds Banking Group Pension Trustees Limited sought clarity from the High Court as to whether it was the duty of the Trustee to remove inequalities in scheme benefits that arise as a result of unequal GMPs.
The judgment confirmed that the Trustee was “under a duty to amend the schemes in order to equalise benefits for men and women so as to alter the result which is at present produced in relation to GMPs.”
The law lords also provided a number of calculations they considered to be most appropriate for undertaking equalisation.
While this removed any doubt as to the responsibility, schemes must now determine just how they are going to tackle the exercise of equalising GMPs .