Policy News Journal - 2011-2012

PENSIONS FOR WORKERS WHO CONTRACTED OUT OF SUPPLEMENTARY STATE SCHEME MUST BE EQUALISED 29 JANUARY 2012 Companies which contracted employees out of the State Earnings-Related Pension Scheme must make sure the same benefits are paid to men and women, the government has announced. The Department for Work and Pensions (DWP) has published draft regulations making it clear that the same normal retirement date must be applied to both men and women receiving guaranteed minimum pensions (GMPs). It has also proposed a methodology that schemes could use to make this calculation. Pinsent Masons have written an update which explains the background and just what this actually means in practice: Following the Barber decision by the European Court of Justice, pension schemes must apply the same normal retirement date to men and women for benefits built up from 17 May 1990. However, since an exemption applies to state benefits, there has been some uncertainty whether this requirement extends to GMPs. GMPs (guaranteed minimum pensions) are benefits provided by pension schemes that contracted out of the State Earnings-Related Pension Scheme (now called the State Second Pension) for service up to April 1997. Since those benefits were intended to make up for lost state benefits, it was unclear whether the state benefit exemption might also apply to them. In any event, the complexities surrounding the way GMPs are calculated have deterred most pension schemes from attempting to equalise GMPs other than on winding-up. In January 2011, the DWP confirmed that it would publish legislation to make it clear under UK law that GMPs must be equalised – even where there are no direct comparable members of the opposite sex in the scheme. This is precisely what the DWP has done. The DWP has also published a proposed methodology. It has stressed that this methodology "would not be legal advice to schemes on how to equalise, or be a definitive statement on how to equalise for the effect of the GMP rules". The methodology is however likely to have persuasive force, having been considered "by a wide range of pension professionals". Pinsent Masons Comment: Many lawyers would have preferred the DWP to take a test case to the European Court of Justice first. That court might have confirmed that GMP equalisation was not necessary. Instead, the draft proposed legislation will make it clear that schemes must equalise GMPs, whatever the position under European law might be. All schemes providing GMPs will have to incur the considerable cost of equalising them. The proposed methodology does not consider whether the benefits of equalising are proportionate bearing in mind the costs. It is complex and requires annual testing of pension benefits. Many defined benefit schemes are already struggling to cope with spiralling costs. This additional burden will be most unwelcome. Where unequalised benefits have been transferred from one scheme to another, there will inevitably be disputes over who should incur the costs.

PENSIONS MINISTER PROPOSES PLANS FOR DEFINED ASPIRATION PENSIONS

10 February 2012 Pensions minister Steve Webb has announced the government plans to consult later this year on how to create a “third option” a “defined aspiration” (DA) scheme which would sit between defined benefit (DB) and defined contribution (DC) schemes.

CIPP Policy News Journal

09/10/2012, Page 178 of 234

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