Industry welcomes ‘clarity’ that GMP case brings; UK pension legislation described as a ‘nightmare’

The pensions industry has welcomed the “clarity” that the High Court ruling on guaranteed minimum pensions (GMPs) brings, but one expert has said the case highlights the “nightmarish complexity” of pensions legislation.

In a ruling announced today, 26 October 2018, Mr Justice Morgan ruled that Lloyds must start the process of equalising the benefits in relation to the GMP.

Royal London director of policy Steve Webb described the judgment as “good news” as it “finally provides clarity” on a “contentious issue”. TLT head of pensions Sasha Butterworth noted that the industry has been waiting for twenty years for clarity on the question. “This is one of the last unresolved equal treatment issues in UK pension law,” she said.

However, Webb warned that schemes will need “urgent help” from government and regulators to know the best way to respond to this judgment. “Members of company schemes could collectively receive a multi-billion pound windfall, but the complexity of making the necessary calculations means that members will not be receiving cheques any time soon,” he added.

JLT Employee Benefits director and PMI vice president Lorraine Harper also noted that the process of equalizing the benefits will be a “hugely long and complex task” which will bring “major implications for DB schemes across the private and public sector swallowing the £20bn estimated cost of equalising GMPs across all contracted out schemes.

The clarity will bring anxiety to employers, Butterworth added, as they try to understand how they must comply with this ruling and the true scale of impact on their liabilities. Market commentary suggests it could add around 1-4 per cent of liabilities to each pension scheme, potentially up to £20bn in total.

"Many employers and trustees have been preparing their data in anticipation of the judgment, but what needs to happen now is to set up a project team to decide on actions and how to communicate with members about how this might affect them," she said.

Stephenson Harwood pensions partner, Stephen Richards was shocked to see that the court had given its view on how to equalise GMPs.

"I was hoping the court would be brave and give a view on how to equalise GMPs but it wasn't something I was necessarily expecting. Now the court has given its view on equalising GMPs in this case, pension schemes will need to look more closely at tackling this gritty problem that many had quite gladly kicked into the long grass,” he said.

However, while many will think that it is women set to gain from the judgment, analysis by Aon suggests that men will be the biggest beneficiaries. Aon principal consultant Tom Yorath said: "Our analysis suggests that for a typical scheme the average increase to individual pensions is around 1 per cent - although depending on the scheme rules we have seen schemes where costs were up to four times this. On an industry-wide level this could mean a cost of around £15bn."

"While the overall costs to the industry are certainly significant, this ruling will not have a material benefit for all scheme members. Most pensioners will see no increase and for those pensioners who see some increase, only a small number will receive more than an extra few pounds a month.

“Although, most schemes will see a mixture of men and women receiving some increases, our analysis of more than 50 pension schemes suggests it is men who are more likely to benefit. In the vast majority of cases this is mainly a reflection of the legacy inequality in state benefits between men and women, rather than conscious unequal treatment by employers."

    Share Story:
Spotlight on pensions tracing: making huge strides in a changing world
Alex Mitchell, Head of Tracing & Data Solutions at Capita, meets Francesca Fabrizi, Editor in Chief of Pensions Age to discuss recent trends in the pensions tracing space

MAC strategies in focus
Francesca Fabrizi meets Craig Scordellis, Head of Long-Only Multi-Asset Credit at CQS, to discuss what MAC strategies can offer pension schemes today