Between April 6, 1978, and April 5, 1997, employers could contract their employees out of the then State Earnings Related Pension Scheme and pay reduced National Insurance contributions. In return the employer provided a guaranteed minimum pension benefit under its pension scheme in lieu of the SERPS benefit employees would forgo. In 1988 an alternative, money purchase contracting-out option was introduced, and in 1997 the original salary-related contracting-out system of GMPs changed to a reference scheme test. Despite the end of contracting-out on April 6, 2016, affected schemes still retain obligations relating to any GMPs they hold.
Ever since the ECJ’s Barber judgment on May 17, 1990, the principle of equal pay for men and women has applied to occupational pension scheme benefits in the UK. It was previously common to have different normal retirement ages for men and women, and other differences of treatment. Trustees had to “level up” benefits for the period from May 17, 1990, to the date benefit accrual was actually equalised in the individual scheme.
GMPs though, have always presented a particular equalisation problem. The GMP sits within the scheme pension and pushes up its overall value. The structure of the GMP is laid down by law and is inherently unequal as between men and women. GMPs come into payment at 65 for men, and 60 for women. In addition, the female GMP will be a larger proportion of her overall pension as a woman’s GMP accrued at a faster rate than a man’s to reflect her shorter working life.
This inherent inequality shows up as soon as the pension comes into payment. Revaluation of the GMP is at a different rate to the excess over the GMP and, for GMPs, finishes at the unequal GMP age. Late retirement factors are different for GMPs and the excess, and start for GMPs at the unequal GMP age. And finally pension indexation is different for the GMP and the excess. So a woman may initially see greater increases than an equivalent man, and then the situation may reverse over time. Who would end up better off in the end is difficult to predict, being a combination of many different factors.
With GMPs being statutory, and the degree, and indeed the victim, of inequality fluctuating over time, there was no consensus in the industry as to the extent to which further equalisation was needed, nor the method to deliver it. The risk of getting it wrong was high and potentially expensive.