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What are Guaranteed Minimum Pensions (GMPs)?

People who reached State Pension age before 6 April 2016, are covered by the old State Pension. The old State Pension is composed of two tiers:

  • The basic State Pension (paid at a flat rate for people with the required ‘qualifying years’ of National Insurance contributions or credits).
  • The additional State Pension, which was earnings-related.

When the additional State Pension was introduced in 1978 there was an option to “contract-out”, where employees and their employer would pay less National Insurance and leave the additional State Pension. Between 1978 and 1997, contracted-out schemes had to provide an individually calculated Guaranteed Minimum Pension (GMP).

Contracting-out ended when the new single-tier State Pension replaced the basic and additional State Pensions in April 2016.

Requirement to equalise GMPs

The Pension Schemes Act 1993 required GMPs to be calculated on a different basis for men and women to reflect differences in the state pension age at the time. This led to inequalities in the rate at which benefits build up in the scheme and the age at which they can be drawn.

Following decisions of the European Court of Justice, since reflected in UK law, the position of successive governments 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 how the legal requirements applied to 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 did not specify the approach schemes should take to GMP equalisation. Following consultation, the Government issued guidance in April 2019 on one approach, which involved:

  • 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
  • Converting this into scheme benefits that are no longer subject to the (unequal) requirements of the GMP.

The Government had legislated to enable schemes to convert GMPs into scheme benefits in the Pensions Act 2007.  However, in its 2019 guidance, the Department for Work and Pensions 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 to address pensions industry concerns that the existing legislation was unclear in some areas.

The Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022

The Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 amended existing legislation to:

  • Clarify that the legislation applies to survivors as well as earners.
  • Allow the government to set out in regulations the conditions that must be met in relation to survivors’ benefits and set out in regulations detail about who must consent to the conversion.
  • Remove a requirement for schemes to notify HMRC when they carried out a conversion exercise.

Following the Act, HMRC issued further guidance for schemes on GMP equalisation in April 2022, particularly in relation to tax implications of different methods that schemes use for GMP equalisation.

Further guidance was issued in June 2022 by HMRC about how to deal with pension scheme arrears and interest when equalising for GMP.

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