Employers need to be proactive and reflect the cost of guaranteed minimum pension equalisation, pensions consultancy XPS Pensions Group has warned.
The High Court ruled last month in favour of three female pension scheme members of the Lloyds Banking Group pension plan who saw their pension rise at a lower rate than men in the scheme. The judgment confirmed the need to improve benefits and make allowances between males and females in guaranteed minimum pensions – known as GMP equalisation.
XPS says the impact of this ruling is most significant to trustees and employers, and expects up to eight in every 10 schemes to have GMPs, and the cost to firms could be in the region of £10bn if unprepared.
XPS principal Wayne Segers says: “It is unwelcome news for employers that they are now forced to quickly calculate the cost of GMP equalisation. In order to prevent overestimating in their accounts, employers do need to look at all options available to estimate the cost.
“We are helping our clients do this and are seeing a number of cases where the expected cost is lower than originally thought. Our view is if employers embrace this change it is an opportunity for them to ultimately remove their GMPs once and for all and simplify benefits, reducing future administration burden and cost.”
Are more pension transfer changes on the horizon?
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The High Court recently ruled that pension benefits need to be equalised between males and females to account for the effect of guaranteed minimum pension. The judge concluded it is the scheme trustees’ duty to amend the scheme to provide GMP equalisation benefits in a similar form to current benefits.
This ruling could impact the pensions industry in a number of ways:
- Advisers may find it difficult to recommend, and evidence the suitability of, transfer recommendations where the client could miss out on additional benefits from GMP equalisation. We may see the only cases that proceed to transfer in the interim are those at retirement or without GMP benefits.
- Schemes may delay the production of cash equivalent transfer value quotes, without breaching their legal obligations, or issue them with the warning that members may lose equalisation benefits.
- The methodology for calculating pension redress may also be affected, with firms needing to consider whether there is any further liability arising from GMP benefits. In-flight pension redress projects for contracted-out pension schemes may need to be put on hold and previous redress calculations revisited to ensure there is not any additional redress owed.
While these changes may not materialise immediately, as the industry awaits further guidance from the DWP and FCA, it is important to be aware of the impact they could have on regulatory expectations and processes.
Harry Eastwood is head of actuarial and redress at TCC