Five-minute read on the background to GMP

Between 1978 and 1997 pension schemes were able to contract out of what was the State Earnings Related Pension Scheme (SERPS). Employers and members were afforded lower rates of National Insurance, but in return members had to be provided with a minimum level of pension benefits for this period of service – this is the Guaranteed Minimum Pension (GMP). 

GMPs applied to any salary-related contracted out pension scheme of which the majority are final salary schemes but there are also a few money purchase schemes that adopted this method.  GMPs are payable from age 60 for females and 65 for males but despite the fact that the State Pension Age has changed (at least in part) for equalisation purposes the age at which GMP is payable has not. The rules on GMPs can be complicated but there are other rules which create further inequities between the accrual of GMP for a male and female.

This was complicated enough, but then came the Barber judgement which ruled that benefits accrued after 17 May 1990 must in general be provided on equal terms to men and women. Because the State Pension was exempt from this ruling it was thought that GMPs would also be exempt, but this view was challenged.

In 2010, the Government concluded that European law required GMPs to be equalised. In January 2012, the Department for Work and Pensions (DWP) consulted on draft regulations to require schemes to equalise GMPs and a possible method for doing so but this was never taken forward due to the costs involved.

In November 2016, following feedback from the pensions industry, the DWP consulted on a simplified method of equalising GMPs, whereby a one-off value test was carried out. This test compared the value of benefits accrued between 17 May 1990 and 5 April 1997 for each member and for a comparator member of the opposite sex. The higher value was then to be converted to a non-GMP benefit.

In 2018 the High Court ruled on a case brought by the Lloyds Banking Group and scheme trustees, which asked:

  • Are trustees required to equalise GMPs?
  • If so, how such equalisation should be achieved?
  • How the trustees’ power should be used to make it happen?

The High Court ruled that the inequality between men and women in respect of GMP benefits is not compatible with UK or EU legislation. Therefore, GMP benefits accrued between 17 May 1990 and 5 April 1997 will need to be reviewed in accordance with this ruling, with equalisation and rectification carried out in line with whichever method a scheme’s trustees adopt.

While the ruling specifically recommended a method of equalisation for Lloyds Bank, the door was left open for other schemes to follow one of the other methods that the High Court considered during its deliberations.

This is where the trustees and sponsors of affected pension schemes now have a decision to make. Any decision will no doubt consider first and foremost the impacts on the membership but ultimately the emphasis will have to be on both the costs of running an exercise to equalise benefits and the costs of administering the scheme into the future.

To find out more about GMP Equalisation, click here.