Pensions for workers who contracted out of supplementary state scheme must be equalised, Government says

Out-Law News | 23 Jan 2012 | 3:39 pm | 2 min. read

Companies which contracted employees out of the State Earnings-Related Pension Scheme must make sure the same benefits are paid to men and women, the Government has announced.

The Department for Work and Pensions (DWP) has published draft regulations making it clear that the same normal retirement date must be applied to both men and women receiving guaranteed minimum pensions (GMPs). It has also proposed a methodology (39-page / 283KB PDF) that schemes could use to make this calculation.

In 1990 the European Court of Justice (ECJ) ruled that pension schemes must apply the same normal retirement date to men and women for benefits which built up after 17 May 1990. However, this did not extend to state benefits.

In January 2011, the DWP confirmed that it would publish legislation to make it clear that GMPs must be equalised under UK law, even where there are no directly comparable members of the opposite sex in the scheme. It added that it would not take a test case to the European Court of Justice (ECJ) because such a case would "only prolong the uncertainty around this issue and, given the clarity of the legal obligation to equalise for the effect of GMPs, would not take the matter any further forward".

The Guaranteed Minimum Pension (GMP) is the minimum pension which an occupational pension scheme has to provide for those employees who were contracted out of the State Earnings Related Pension Scheme (‘’SERPS’’) between 1978 and 1997. Although the GMP system was replaced from 6 April 1997 by a Reference Scheme Test for schemes which contract out of the State Second Pension, which itself replaces SERPS, pension schemes are still liable to pay GMPs that have been earned for periods of service between 1978 and 1997.

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the DWP believed that the proposed regulations would do no more than formalise trustees' existing obligations under EU law. He added that pension scheme trustees had been waiting "a long time" for the Government to try to sort the issue.

"Since GMPs were intended to make up for lost state benefits, it was unclear whether the state benefit exemption might also apply to them. It is disappointing that the Government did not run a test case, as there are arguments that GMPs do not need equalising at all," he said.

"All schemes providing GMPs will have to incur the considerable cost of equalising them. The proposed methodology does not consider whether the benefits of equalising are proportionate bearing in mind the costs. It is complex, requiring annual testing of pension benefits, and the industry will need time to digest whether it is practical," he said.

He added that many defined benefit schemes, which are schemes that promise a set level of pension once an employee reaches retirement age, were already struggling to cope with spiralling costs due to increases in life expectancy and poor investment results. The "additional burden" of equalisation would be "most unwelcome" he said.

The DWP said that it would not place any obligation on pension schemes to use its new method.

"If published, it would not be legal advice to schemes on how to equalise or be a definitive statement on how to equalise for the effect of the GMP rules. However, schemes would know [this method] had been considered by a wide range of pension professionals," it said in a statement.

It asked for comments on the draft regulations and methodology by 12 April 2012.