Pensions World

The government has launched a consultation on equalising pension benefits for the effect of unequal guaranteed minimum pensions (GMPs). 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.

“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 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 cannot 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 first 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. Schemes which have bought out have had to grasp this nettle, so there will be other precedents out there.

“Gains to individual members will usually be quite small. Collectively, however, costs to employers could still run into billions of pounds. The prospect of incurring these costs has been an obstacle to schemes converting 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: “Pension schemes already have enough on their plate and the administrative headache this will create could not have come at a worse time.”

The consultation closes on 12 April.

www.dwp.gov.uk