personal finance

Companies face £15bn bill over unequal pension payments

Thousands of businesses with traditional final salary pension funds are facing a bill of up to £15bn after a landmark court ruling outlawed different payments to men and women.

In a judgment with far-reaching implications across the corporate sector, the High Court ruled that Lloyds Banking Group must amend its pension rules to equalise pension payments for men and women.

Lloyds has estimated its bill from the ruling, which will result in higher pensions for affected members, at £100m-£150m.

Mr Justice Morgan ruled the Lloyds pension trustee was under a duty to amend the bank’s pension scheme, after a case brought by three female members of the scheme who are claiming sex discrimination on the grounds that their pensions increase at a lower rate that those of their male counterparts.

“The Trustee is under a duty to amend the schemes in order to equalise benefits for men and women so as to alter the result which is at present produced in relation to GMPs [Guaranteed Minimum Pensions],” the judge ruled on Friday.

The case centres around Guaranteed Minimum Pensions for employees whose employers contracted them out of the State Earnings Related Pension scheme between 1990 and 1997.

Under contracting out, employees and employers were allowed to pay a lower rate of national insurance. In return, businesses promised a GMP to employees, which was to be “broadly equivalent” to what they would have received from the state pension, had they not been contracted out. Currently, rules allow GMPs to be calculated differently for men and women.

The High Court was asked to rule on whether GMPs needed to be equalised and, if so, how this should be done. In 1990, the law was changed to say that all UK pension schemes had to equalise pension ages for women and men, but the law setting out the way their GMPs were treated did not alter.

Stephen Scholefield, partner at Pinsent Masons said that while the unequal payments had existed legally for the past 30 years the court ruling had clarified the issue.

“The ruling was very clear that the inequality caused by GMPs had to be addressed by trustees and there’s no justification based on the fact the inequality was set out in legislation,” said Mr Scholefield.

The ruling will potentially affect millions of people who contributed to contracted out private and public sector final salary pension schemesbetween 17 May 1990 and 5 April 1997, who had Guaranteed Minimum Pensions.

“Members should welcome the decision, as we expect millions of people will get extra pension as a result,” said Matt Davis, Partner at Hymans Robertson, an actuarial firm.

Experts originally estimated that the cost of equalising GMPs across all contracted out pensions could reach £20bn. But experts suggested this figure will now be lower in part due to the court deciding that for pensioners back payments can be restricted to six years if scheme rules allow.

“Our analysis suggests that for a typical scheme the average increase to individual pensions is around 1 per cent — although depending on the scheme rules we have seen schemes where costs were up to four times this,” said Tom Yorath, principal consultant at Aon, who acted as an expert witness in the case. “On an industry-wide level this could mean a cost of around £15bn,”

“The cost of equalisation could be a serious strain on some sponsors — particularly those with large schemes relative to the size of their business.”

However, Mr Yorath added that most pensioners will see no increase and for those who see some increase, only a small number will receive more than an extra few pounds a month.

The Treasury was an interested party in the case but said the ruling did not affect the public sector. “Public sector schemes already have a method to equalise guaranteed minimum pension benefits, which is why we will not have to change our method as a result of this judgment,” am official said.

Lloyds said in a statement: “The hearing focused on what is a complex and longstanding industry-wide issue. The group welcomes the decision made by the court and the clarity it provides. The group and the pension scheme trustee will be working through the details in order to implement the court’s decision.”


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