Guy M Dove explains the background behind the GMP equalisation debate and why it is once again the centre of attention

Like flu epidemics, some pension issues don’t ever really go away; they just disappear for a while and then come back bigger, bolder and even more difficult to deal with. The latest come-back story in the pension world is our old favourite ‘equalisation’, where the added twist of GMP equalisation is proving quite a challenge.

Setting the scene
Historically occupational pension schemes were mostly set up with a normal retirement age of 65 for men and 60 for women. From a 1950s viewpoint, this seems perfectly logical, mirroring the state pension ages, which assumed most men and women were married, with (on average) the husband being a few years older than the wife. With the age 65/60 normal retirement ages, they would (on average) retire at about the same time.

The Barber judgement and what trustees did about it
The Barber v Guardian Royal Exchange (GRE) judgement on 17 May 1990 compelled trustees of occupational pension schemes to provide equal benefits to men and women. Mr Barber, an actuary employed by GRE, took his case to Europe and won, causing massive upheaval in the pension world as schemes wrestled with the necessary rule changes.

Schemes were equalised in a variety of ways, from harmonising retirement ages to granting service credits, which actuaries at the time advised as adequate compensation for having unequal retirement ages. Trustees usually amended their Scheme Rules a few years after 17 May 1990, leading to a ‘Barber window’. If a scheme equalised, for example, on 1 July 1995, there would be a Barber window from 17 May 1990 to 1 July 1995 in which males with a NRA of 65 would be able to retire from age 60 without reduction if female members had this right.

The major hole in the judgement was that it did not apply to GMPs.

Revisiting equalisation
Many pension schemes that dealt with equalisation in the early or mid-1990s subsequently wound up and lawyers are finding that some 1990s rule amendments closing the Barber window were ineffective. For example, the trustees may have thought they had equalised by approving a resolution, when in fact they should have used a full Deed of Amendment. Often key documentation such as announcements to members are missing, particularly when the sponsoring employer no longer exists or has become insolvent, or scheme booklets may contradict what the Scheme Rules say.

Failure to close the Barber window has major consequences on the funding position of pension schemes and the administration. One scheme had a four year Barber window which eventually became a 16 year window. Another scheme, which only ever had male members, still had to be adjusted for equalisation after taking legal advice regardless of the fact that the trustees had tried (and 15 years later, it was ruled, failed) to do something about equalisation.

The point is that trustees seeking to wind-up a scheme or enter a PPF assessment period should note that although they may have thought equalisation was dealt with a decade and a half ago it will need looking at again.

And finally…
GMP equalisation
In January 2012 the government finally set out a proposal as to how GMPs should be equalised after the PPF set out its methodology in late 2011. The GMP calculations themselves (though fairly involved and particularly complex when matters such as anti-franking and Later Earnings Additions are taken into account) are by no means impossible for administrators and their systems to cope with. Indeed there may be a growing market out there for firms to do one-off GMP equalisation project work. Unsurprisingly, the real problem lies in the data, which needs to go right back to 1978/79 to allow accurate calculations to be carried out.

By the time these calculations have to be done, a pension scheme may have been run by several different organisations, there could have been multiple bulk and individual transfers, employers may have been liquidated, contracted-out histories lost, trustees come and gone. Trustees can always opt to use NICO’s data but there is no guarantee that NICO is right and, ultimately, benefit costs can spiral.

If member data was perfect, GMP equalisation would be more straightforward. However, if the data is missing or incomplete then trustees will need to understand that this will be an even more complex job than originally thought.

Written by Guy M Dove, associate at Barnett Waddingham

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