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When the State Earnings Related Pension Scheme was introduced in April 1978, it was possible to contract-out of it into an occupational pension scheme. A condition of it being used to contract-out was that the scheme provided a defined benefit (known as a GMP). The requirement to provide a GMP was removed from April 1997 but schemes still have to provide them for rights built up before that date.

The Pension Schemes Act 1993 required GMPs to be calculated on an unequal basis, with the age at which it can be drawn and rate at which benefits build up, different for men and women. This reflected inequalities in the State Pension age at the time.

Requirement for equalisation

On 17 May 1990 the Court of Justice of the European Union ruled that occupational pensions were deferred pay and, as such, schemes had to treat men and women equally: “the Barber judgment.” The judgment, which applies to rights built up from 17 May 1990, imported an equal treatment rule into occupational pension scheme rules. This means that, where a scheme rule would result in a member of one sex being treated less favourably than one of the opposite sex, it must be read as though it does not do so.

The position of successive governments – following decisions of the European Court of Justice, since reflected in UK law – has been that pension schemes “are under an obligation to equalise overall scheme benefits accruing from 17 May 1990 including, in respect of accruals from 17 May 1990 to 5 April 1997, any inequality resulting from the GMP rules, where an opposite sex comparator existed in the scheme.”

Debate about the legal requirements on schemes regarding GMP equalisation continued until October 2018, when the High Court held in  Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank PLC and others that schemes were “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.”

Approach to equalisation

The legislation does not specify the approach schemes should take to GMP equalisation. Following consultation, the Government issued guidance in April 2019 on one possible approach. This involves:

  • Placing an actuarial value on benefits accruing between 17 May 1990 and 5 April 1997;
  • Taking the higher of two values i) that of the member’s benefits; and ii) what it would have been had the member been of the opposite sex during that period; and
  • Converting this into scheme benefits that are no longer subject to the (unequal) requirements of theGMP 

This involves GMPs being converted into scheme benefits, which the Government had legislated for in Pensions Act 2007 (s14). However, in its 2019 guidance, DWP noted that the provisions had been rarely used in practice.

Following the Lloyds Bank judgement, the Government said it would make changes to the existing GMP conversion legislation. This was needed to address pensions industry concerns that the existing legislation was unclear in some areas.

Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill 2021-22

Margaret Ferrier’s Private Members’ Bill – Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill 2021-22 – would clarify the existing legislation on GMP conversion, addressing pensions industry concerns that it:

  • Is unclear as to how conversion applies to survivor benefits (the element of a GMP which can be inherited by the member’s widow or widower or surviving civil partner).
  • Does not provide for circumstances in which the scheme’s sponsoring employer no longer exists and therefore cannot consent to a proposed conversion exercise.
  • Requires schemes to notify HMRC that they have carried out a conversion exercise, even though the introduction of the new State Pension means that HMRC do not need to be informed about changes to GMPs.

The Bill is scheduled to have its Second Reading in the House of Commons on 26 November 2021. The Explanatory Notes for the Bill were prepared by the Department for Work and Pensions.

There is a Library Briefing Paper on the Bill CBP 9317. The arrangements for increasing GMPs in payment are discussed in Library Briefing Paper CBP-4956.

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