The Government is preparing to snub calls to bring a European Court of Justice test case about how to equalise male and female guaranteed minimum pension payments due to concerns over cost.
The Association of Consulting Actuaries chairman Stuart Southall is warning that forcing pension schemes to equalise their GMP payments will cost employers £10bn. It is calling on the Government to bring a case to the ECJ to clarify how the equalisation will work in practice.
The Government is instead planning to issue draft guidance to the industry later this year. The requirement to equalise GMPs will then be formally written into UK legislation.
Southall says: “Aside from one isolated case, I have never known any beneficiary query the possible inequality of GMPs and nor does it seem there is any legal consensus that equality is required by law or even achievable if it is.
“If the Government feels it has to press ahead with an initiative which could cost the industry £10bn, plus a significant implementation bill, then would it not be best to do so with as much legal certainty as possible? This can only be achieved by an European Court of Justice test case.”
GMPs are the minimum level of pension an occupational scheme is required to provide to people who contracted out of Serps between April 6, 1978 and April 5, 1997.
The problem facing pension schemes is that, since the Barber case in 1990, they should have been calculating members’ GMP payments on a gender-neutral basis.
However, virtually all schemes have ignored the sex inequalities that existed in the calculation of the payments.
Society of Pensions Consultants president Kevin LeGrand, who has been in negotiations with DWP officials since Angela Eagle issued a statement in January last year telling pension schemes they would need to equalise GMPs, says bringing a test case would cost the DWP around £500,000.
He says if departmental spending constraints prevent the pursuit of a test case, the Government should provide a blueprint to the industry by equalising GMPs in a large-scale public sector scheme.
He says: “The Government has received legal advice that GMPs have to be equalised, so this is something we are going to need to tackle.
Hopefully, the guidance DWP is going to produce will be a step forward but we still think the best way would be a test case to the ECJ, although given the vagaries of some ECJ rulings, there is no guarantee that is going to sort it but at least then we would have a legal basis upon which to work.
“But the Government’s view is that any advantage of getting a decision from Europe is outweighed by the costs of mounting a test case.
“We have also suggested that the Government uses a public sector scheme as a path-finder to give the industry some practical guidance on how we should be dealing with this but they do not want to do that either.”
What are guaranteed minimum pensions?
Guaranteed minimum pensions, or GMPs, are the minimum level of pension an occupational pension scheme is required to provide people who contracted-out of the state earnings related pension schemes between April 6, 1978 and April 5, 1997.
What is the problem?
Since a European Court of Justice Ruling on May 17, 1990, trustees have been required to pay men and women “comparable benefits” in relation to service from the judgment date.
However, since then, most schemes have ignored the sex inequalities that existed concerning the calculation of GMPs. For example, women are entitled to receive their GMP at age 60 compared with age 65 for men.
The complexities in making male and female GMPs equal meant the pension industry and the Government kicked the issue into the long grass for 20 years.
What is the Government’s stance?
In January 2010, former pensions minister Angela Eagle told schemes they would need to make specific adjustments to benefits to compensate members for the unequal effects of GMPs.
Officials at the Department for Work and Pensions have received legal guidance that pension schemes must do this. </B>
What happens next?
The DWP is likely to publish draft guidance later this year, although an European Court of Justice test case is not expected to be pursued on cost grounds.