Seven leading bodies represented on the Occupational Pension Schemes Joint Working Group, who liaise with Government on workplace pension policies, have written a joint letter to the Pensions Minister opposing the way in which the Government is proposing that pension schemes equalise guaranteed minimum pensions.
The Department for Work & Pensions (DWP) consultation takes a court case (Allonby) and legal advice received by the DWP (which it will not publish) on a relatively minor point as the catalyst for an exercise to promulgate the view that there is now a clear need for all pension schemes to equalise for the effects of guaranteed minimum pensions (GMPs). Pensions lawyers believe that doubts remain about the need for equalisation, which would need a court case to clarify.
The DWP approach is based on an assumption that contracted out pension schemes should have equalised the effects of unequal GMPs since the European Court judgement on the Barber case in 1990. This is notwithstanding the facts that it was Government legislation that perpetuated unequal GMPs until 1997, and that, since then, no practical solutions have been offered by Government. The great majority of pension schemes equalised their overall benefits in the early 1990s, which in most cases meant bringing scheme pension ages into line with one another. The reason for schemes setting GMPs to one side, was because trustees and employers did not want to try to tackle legislative requirements without knowing what they needed to do, if indeed there was any legal obligation to do anything at all, rather than because they were trying to evade costs.
In their letter to Steve Webb, the Pensions Minister, the Association of British Insurers (ABI), the Association of Consulting Actuaries (ACA), the Association of Pension Lawyers (APL), the Institute of Chartered Accountants in England & Wales (ICAEW), the National Association of Pension Funds (NAPF), the Pensions Management Institute (PMI) and the Society of Pension Consultants (SPC) say:
The Occupational Pensions Schemes Joint Working Group (JWG) response notes that DWP has stated that there is no need for the DWP to provide an impact assessment of the proposed new legislation, on the grounds that no new liability is created.
The JWG bodies disagree and note that:
The JWG response estimates that implementing equalisation programmes for all private sector contracted out schemes on a basis of equalising actuarial values would add in the region of £13bn to pension scheme liabilities, and could absorb up to £300m in implementation costs. To impose costs of this magnitude on UK industry at a time of economic uncertainty is unacceptable.
Both of these figures would be significantly higher if the possible equalisation method set out in the DWP’s consultation document is adopted. The costs of the DWP approach are hard to quantify, but the JWG response says these could easily double the figures shown above. Under the DWP method, it is entirely possible that a male and a female with identical service and earnings history will both receive increases to their unequalised benefits at different points in their lives. The DWP method would also require pension schemes to run duplicate records and duplicate calculations for each member, an arrangement which no pension administration system is set up to provide.
Author: Pensions WorldPensions World is the leading monthly magazine for pensions professionals published by LexisNexis.