So, the High Court has ruled that trustees are required to equalise benefits for male and female members under their scheme for the effect of GMPs. This judgment impacts all schemes which were contracted-out between 17 May 1990 and 5 April 1997 and which provide GMPs.
There are a number of questions which remain unanswered (such as whether trustees have to revisit past transfers out), but the judgment provides enough certainty that trustees and sponsors will now need to take prompt action to implement equalisation in their schemes. So what steps should trustees be taking?
Before trustees can equalise members’ benefits under their scheme they first need to:
- obtain legal advice on the implications of the judgment for their scheme, including advice on the most appropriate method for achieving equalisation under their scheme, the options for adopting a simplified approach (see below) and the period over which back payments will need to be made (based on the rules of their scheme)
- commission a review of scheme data to determine whether they have all of the data necessary to equalise the benefits of affected members
- ask the scheme actuary to estimate the cost to equalising members’ benefits using the various methods approved by the Courts
- assess the costs and practicalities associated with the various equalisation methods that could be used and seek to agree the approach to be taken with their scheme’s sponsor, and
- seek to agree with their scheme’s sponsor how the funding impact on the scheme (arising from the anticipated additional liability and the increased administrative costs) will be addressed.
A simplified approach?
Unless a scheme chooses to implement GMP conversion, all of the approaches to equalisation that have been approved by the High Court will require trustees to carry out an annual assessment of members’ entitlements and compare them with those of a comparable member of the same sex. Benefits will then need to be equalised each year, as necessary.
This annual true-up will be administratively complex and the ongoing administrative costs associated with this could be more in respect of some members than the amount of any equalisation uplift.
While trustees cannot avoid the need to equalise members’ benefits, there are steps that they could consider taking to simplify matters and reduce the ongoing costs associated with this. These options include:
- the potential for making a one-off adjustment or payment to compromise the claims of some, or perhaps even all, members (e.g. those who fall below a de-minimus threshold or those for whom the scheme holds insufficient data to calculate their equalised benefit entitlement accurately), and
- converting members’ GMPs into equalised main scheme benefits, thereby avoiding the need for an annual reconciliation exercise to be carried out in the future.
An important question that this judgment did not answer, is the extent to which trustees are required to make top-up payments to members who have previously transferred out of a scheme. That question has been left for another day.
However, an immediate question that trustees need to consider with their legal and actuarial advisers is how to handle transfer payments that fall to be made between the date of this judgment and the point at which the trustees decide how they will equalise members’ benefits?
- Suspend transfers temporarily?
- Make a “rough and ready” enhancement to transfer payments and seek a discharge from members?
- Gold-plate transfers to remove the risk of an underpayment?
- Process transfers as normal and then make additional top-up payments, where necessary, once the basis for equalising benefits across the whole scheme has been decided?
The impact on other benefit payments, such as trivial commutation lump sums, also needs to be considered and advice should be taken on these points immediately.
For a full summary of the judgment and the implications for affected schemes, you can read our recent e-bulletin.