Sixty Second Summary
GMP equalization: conversion route clarified
18 Apr 2019 - Estimated reading time: 1 minute
The parties to the Lloyds Banking Group case were back in the High Court on 3 December 2018, to clarify a technical point about one of the permissible methods of equalizing pensions to remove GMP-derived differences. The subsequent judgement was handed down on 6 December 2018. The gist of it is that the trustees can (if the sponsor agrees) pursue GMP conversion on the basis of the actuarial values of the unequalized benefits: it is not necessary to first equalize pensions using another method.
A quick review
To recap the relevant part of the original Lloyds ruling, the judge said that there were several valid ways of achieving equalization, but only one that the trustees could pursue unilaterally. Whilst there was a route (‘Method D2’) open to them that involved the statutory procedure for converting GMP into ordinary scheme benefits, its use required the consent of the sponsoring banks.
The question raised
At the 3 December hearing, the representative beneficiaries asked the judge to clarify that conversion is a lawful method to which the banks could consent, but only if the benefits were equalized before conversion using one of the other methods (‘Method C2’). The sponsoring banks, and the UK government departments that intervened in the case, argued that equalization prior to conversion was unnecessary.
The judge concluded that the banks’ interpretation was the correct one. He said that the scheme actuary could value the unequalized member’s pension, and that of the hypothetical opposite-sex comparator, and use the higher of the two as the basis for conversion. Moreover, the actuary could and should decide how best to value the unequalized benefits, without the court’s involvement; and could make the necessary assumptions without being tied to an interest or discount rate that he or she might consider to be inappropriate.
He also reiterated his earlier finding that:
‘When GMP conversion takes place, in full compliance with the statutory conditions, it is not open to anyone to oppose such conversion on the ground that it involves interference … with anyone’s rights. Such conversion is authorized by statute in accordance with the statutory conditions.’
Prospects for an appeal
It has been reported that the representative beneficiaries sought the judge’s permission to appeal against his rulings on equalization methods and limitation of claims for back payments, and that it was refused. It is open to them to take the matter directly to the Court of Appeal: they have until Christmas Eve.
Other matters There was no discussion at this hearing of other issues outstanding from the original judgment, such are the position with regards to past transfers, or whether the trustees could adopt a different approach to members for whom the estimated costs of equalization are disproportionate to the value of the additional benefits that the stand to gain.
This supplemental ruling clarifies the approach required for the ‘conversion’ route to GMP equalization. Given the potential costs and administrative complexities associated with equalizing pensions on an ongoing basis, GMP conversion may appear an attractive option for many schemes. Although not addressed directly, it may lead trustees to consider whether to adopt a similar method for equalizing transfer values and trivial commutation lump sums, albeit many may decide to await further clarity from the Department for Work and Pensions and other parties before settling on an approach.