Pensions World

The government has launched a consultation on equalising pension benefits for the effect of unequal guaranteed minimum pensions (GMPs). Already, experts are concerned that its suggestions are very much at the expensive end of the spectrum.

Commenting on the consultation, John Ball, head of UK pensions at Towers Watson, 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 that companies will welcome.  By changing UK law, the government is imposing this on employers regardless of how the courts would have interpreted European law.

"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 will cost more than an overall value test where female benefits are higher during the early years of retirement but lower in later years.  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.

"The government is not saying that other methods of equalising benefits, which might be cheaper, are necessarily illegal.  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.  A lot may come down to whether lawyers think the government's approach is gold-plated.  Schemes which have bought out have had to grasp this nettle, so there will be other precedents out there.

"No attempt has been made by the government to quantify the costs to schemes of equalising male and female benefits upwards where differences result from unequal GMPs.  As its examples show, gains to individual members will usually be quite small.  Collectively, however, costs to employers could still run into billions of pounds.  We would also expect compliance costs to be high in proportion to the gains to members.  The prospect of incurring these costs has been an obstacle to schemes taking advantage of the option to convert GMPs into normal scheme benefits.  If they are going to be saddled with these burdens anyway, simplifying the benefit structure might be something they seriously look at.”

Darren Philp, director of policy, National Association of Pension Funds, added: “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.”

The consultation closes on 12 April.

www.dwp.gov.uk