UK - Draft changes to UK laws to make the Guaranteed Minimum Pension (GMP) equal for men and women will give pension schemes an “administrative headache”, the NAPF says.

The Department for Work & Pensions (DWP) launched a consultation on the equalisation of GMPs at the end of last week.

Darren Philp, director of policy at the NAPF (National Association of Pension Funds) reacted by saying: “Although these changes have been in the pipeline for some time, this is unwelcome news for pension funds.

“Pension schemes already have enough on their plate, and the administrative headache this will create could not have come at a worse time. We will study the detail of what the DWP is proposing and play an active role in responding to its consultation.”

A spokeswoman at the DWP said: “These draft regulations carry no new duties on pension schemes, but it’s right that schemes meet their legal obligations to treat men and women equally, and that’s why we will offer them help to do this.” 
 
But consultants Towers Watson said companies would not welcome the proposals.

John Ball, head of UK pensions at the firm, said: “When employers agreed to finance replacements for state benefits in return for contracted-out rebates, the payments they received reflected the unequal nature of state benefits.

“Effectively, employers are now being told to fund more valuable benefits than the government paid them to provide - obviously not something companies will welcome.”

In its ‘Consultation on the Draft Occupational Pension Schemes and Pension Protection Fund (Equality) (Amendment) Regulations 2012’, the DWP proposed changes to the Equality Act 2010 and the Pensions Act 2004, to bring the UK into line with European law.

The key change is that the rules requiring sex equality in the application of GMP provisions will apply even if there is no “opposite sex comparator” available. This comparator is someone of the opposite sex in similar work who was treated more favourably.

The GMP applies to SERPS (the State Earnings Related Pension Scheme), which began in 1978. Employers’ schemes could contract out if they gave a pension at least as good as the GMP, or statutory minimum. GMP rules provided for different payments for men and women.

Even though the GMP rules were abolished in 1997, past accruals at pension schemes are still subject to them.

Towers Watson said the government was imposing this on employers regardless of how the courts would have interpreted European law.

Ball said: “The DWP has suggested a method of equalising benefits that is very much at the expensive end of the spectrum, both in terms of extra payments to members and in terms of administrative costs. 

“Schemes following this approach would have to give each member the better of male benefits and female benefits, not only overall but also in each year of retirement.”

An annual equality test would be more expensive than an overall value test where female benefits were higher in the early years of retirement but lower later on.

“Saying that benefits can’t be equal unless each member receives maximum benefits each year is like saying a team can only win a football match if it is leading from the 1st minute to the 90th,” Ball said.

KPMG said the guidance made the GMP equalisation less clear - not more.

Pensions partner at the firm Mike Smedley said: “[The] draft guidance aims to clarify the issue of how to equalise the calculation of the fiendishly complicated ‘guaranteed minimum pensions’ for men and women. However, it seems to only add to the confusion and opaqueness of the issue.”

He said it was hard to understand why the guidance had been issued anyway, given the lack of concern in the industry about it and the fact there was no legal challenge underway. 

Many schemes are likely to find that working out the impact of this guidance and implementing it is more costly than the benefit to members, KPMG said.

Ball noted the government was not saying other, possibly cheaper, methods of equalising benefits were necessarily illegal. 

He added: “Employers and trustees will therefore have to weigh the sense of external validation from following the government’s method - assuming this survives the consultation - against the extra costs.”

Topics