A pragmatic decision from the Pensions Ombudsman on GMP equalisation

Posted by John Hamilton on
The existence of a legal requirement to equalise GMPs has been a vexed question within the pensions industry for many years. Most ongoing defined benefit schemes with GMP liabilities have taken the view that they should take no action to equalise GMPs until required to do so by UK legislation. Support for this approach has recently been given by the new Pensions Ombudsman, Anthony Arter, in a deferred member complaint against the trustees, actuary and administrators of the Campden R. A. Pension Scheme.

The GMP is the minimum pension which an occupational pension scheme has to provide for those employees that were contracted out of the State Earnings Related Pension Scheme (SERPS) between 1978 and 1997. Although contracting out will be abolished altogether when the new state pension takes effect next April, pension schemes are still liable to pay GMPs that have been earned for periods of service between 1978 and 1997.

Dr Kenworthy had joined the Campden R.A. Pension Scheme on 1 August 1991. At that time, the scheme's normal retirement date (NRD) was 62.5 for male members and 60 for female members. The NRD was equalised at 62.5 for both sexes on 17 November 1999, and increased to 65 on 1 January 2003.

In his complaint to the Pensions Omubudsman, he argued that the requirements of equal treatment law should mean that,

  • he should have been entitled to have been given a late retirement factor which would have been applied to his GMP benefits up to age 65
  • the scheme actuary should, as part of a test for checking that equalisation had been properly carried out, have calculated an actuarial enhancement for all of his pensionable service before the NRA increased to 65, including GMP.

On the second point, the actuary had carried out such an underpin calculation, but the interpretation of the test carried out by the actuary had excluded any GMP. Dr Kenworthy argued that this interpretation treated male members less favourably than female members due to the difference in retirement ages, and was therefore incompatible with the 2010 Equality Act.

Dismissing Dr Kenworthy's complaint, the Ombudsman held that it was for the scheme actuary to recommend and certify as reasonable to the trustees the method in which a calculation for equalising benefits between men and women was to be carried out. The Trustees and scheme actuary were fully entitled to use a method which calculated a deferred pension at Normal Retirement Date which excluded GMPs.

The Ombudsman also indicated that trustees can continue to defer taking action to equalise GMPs whilst this issue generally remains unresolved and until they were required to take action by law.

Although the decision is to be welcomed, GMP equalisation will continue to be an unresolved issue for contracted-out defined benefit schemes.  The government put forward proposals for the equalisation of GMPs in 2012, however these were heavily criticised by the industry and were never finalised. However, we understand that the government is currently undertaking a further review of whether and how GMPs should be equalised. For now, watch this space…

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John advises corporate and trustee clients on pensions law and is a director of Blake Morgan's Pension Trustees Limited, the firm’s independent trustee company.

John Hamilton
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