DWP Consultation on GMP Equalisation Response from The Pensions Management Institute
- 2 - Response to DWP consultation on GMP equalisation 1 Introduction The Pensions Management Institute (PMI) is the professional body which supports and develops the experts who run UK pension schemes. PMI is at the very heart of the pensions industry with a membership of some 6,000 pensions professionals and trustees which includes many of the thought leaders who drive retirement provision in this country. Their experience is therefore wide ranging and has contributed to the thinking expressed in this response. The PMI s Response We set out our responses to the specific questions raised by the consultation in the schedule to this document. To place those responses in context, however, we cannot stress too strongly the immense cost (in money and manpower), and the sheer impracticability, of what is being proposed particularly given the dubious legal justification for embarking on this exercise in the first place. There is no widely perceived sense of unfairness as between men and women arising from the GMP issue; if there were, its only basis could be the corresponding inequality in the additional state pension that has given rise to it (and there has never been any suggestion of the Government taking steps to equalise that). However, there will be grave unfairness to both men and women if schemes and employers are forced to address GMP equalisation, which they simply cannot afford. With estimated GMP equalisation costs in the region of 10-20 billion, these problems cannot be ignored. In short, the most likely outcome can be summarised as follows: (a) (b) (c) (d) a sudden material drop in defined benefit scheme funding levels across the board; a consequent rise in employer contribution rates, with all the adverse results for UK industry, economic growth and international competitiveness that this would entail, and a consequent reduction in budgets available for other pension provision e.g. under autoenrolment; a likely escalation in company insolvencies and job losses; a surge in the number of schemes left with no employer and insufficient assets to pay members their benefits with deficits in those underfunded schemes being greater than if the 1 Throughout this response we use the term GMP equalisation and similar expressions in the sense that they are now commonly understood i.e. to mean the levelling up of the actual benefit so as to iron out the impact of GMP differences between men and women, rather than the levelling up of the GMP itself.
- 3 - Government had not introduced a statutory GMP equalisation requirement with the following consequences: pension cutbacks for scheme members who (not being at the top of the winding-up priority order) are forced to meet the equalisation costs out of their own benefits; and a surge in PPF claims; and (e) a corresponding shrinkage in the number of remaining defined benefit schemes available to meet the (increased) demands of the PPF through the statutory levy. Clearly the consequences are material, and should be avoided, if at all possible, particularly in the current economic climate. We shall now expand on some of the underlying issues. It makes sense to start with the legal position, as the DWP s apparent justification for embarking on this course of action seems to be a misplaced notion that it is legally necessary to do so. 1 The legal position 1.1 Do benefits have to be equalised for differences in men s and women s GMPs? The consultation document prominently states: Successive Governments have maintained the position that schemes are under an obligation to equalise overall scheme benefits accruing from 17 May 1990 including, in respect of accruals from 17 May 1990 to 5 April 1997, any inequality resulting from the GMP rules, where an opposite sex comparator existed in the scheme. This is not true. Successive governments remained silent on the GMP issue for practically 20 years following the Barber judgement, presumably because they appreciated the implications of requiring equalisation when it might not be needed. This remained the position until a junior Labour minister spoke out on the subject at the tail end of Gordon Brown s administration in 2010. In other words, it is only during the last 2 years of the (almost) 22 years that have passed since the Barber case that any UK government has maintained the position which the DWP consultation alleges. Regulatory bodies have similarly stood back from the question of whether benefits need to be equalised for GMP differences, until only very recently. In the Williamson case 2 (the only case on this subject to have reached the High Court), the judge declined to be drawn on the issue. We make these points in order to stress that the proposition of needing to equalise for GMPs is not established law in the way that the consultation document suggests. There are 2 Marsh Mercer Pension Scheme v Pensions Ombudsman (2001)
- 4 - highly respectable arguments against there being any such need to equalise, which have never been formally considered or decided upon, and some of these are as follows: 1.1.1 GMPs are not pay The perception that there is a need to equalise for GMPs stems from the principle of equal pay for equal work set out in Article 157 (and its predecessor provisions). It was that principle which gave rise to the Barber decision (which in turn forms the basis of the current GMP debate). It is entirely feasible to argue that a GMP is nothing more than a statutory substitute for a social security payment (i.e. the additional state pension that a member misses out on as a result of having been contracted-out); in other words, that the GMP is simply a statutory payment which the scheme is required to make by law, funded by rebated social security contributions, rather than being a part of the worker s pay. The result of this is that GMPs, not being pay, fall outside of Article 157 (and, therefore, the Barber decision) altogether. 1.1.2 The Birds Eye Walls argument 1.2 Comparator A separate argument arises from the European Court s 1993 decision in the Birds Eye Walls case. Broadly speaking that case allows schemes to pay bridging pensions, calculated by reference to the basic state pension, up to state pension age. The case arose because a man s state pension age is often later than that of a comparable woman, and so he receives his bridging pension for longer. The Court took the view that such a man and woman were not in identical situations (because the woman would receive her state pension sooner) and so this did not count as a form of discrimination. The judge even suggested that continuing the bridging pension up to the same age for both sexes might itself have been discriminatory. This decision, although not concerned with the GMP issue, illustrates a line of reasoning in support of the case against having to equalise for GMPs. Applying the Birds Eye Walls rationale, a woman in contracted-out employment is losing a larger state benefit than a man is; she is therefore not in the same position as him and so the fact that she is paid a different GMP is not a form of discrimination. As for bridging pensions, equalising GMPs for men and women would arguably even mean treating them differently in how they are compensated for the reduced state benefit. Contrary to a well established line of ECJ decisions, the consultation document also asserts that no comparator of the opposite sex is needed in order to bring such an equalisation claim. The only support cited for this view is a very brief passage from the complex Allonby decision.
- 5 - This interpretation of Allonby by the DWP is bold, given the implications. In particular, the Allonby case concerned: 1.2.1 the terms of a statutory scheme (whereas the consultation proposals will mainly cover private schemes). The reference to legislation in the passage on which the DWP is relying was made in the context of the scheme being a statutory one, so this is an important distinction; 1.2.2 indirect discrimination (i.e. discrimination on grounds other than sex, but which tends to disadvantage one sex more than the other), as opposed to direct discrimination (i.e. different treatment as a direct consequence of the member s sex, as in the GMP context); and 1.2.3 equal access to a scheme, rather than (as in the GMP scenario) equal treatment as to benefits after becoming a member of it. This is not a theoretical distinction, as it is clear from the part-timer cases (notably the House of Lords decision in Preston v Wolverhampton Healthcare NHS Trust) that equal access and equal treatment claims are governed by very different legal considerations. To illustrate how farreaching these differences are, equal treatment claims can be brought retrospectively to 1990, but equal access claims can be brought all the way back to 1976. The second of these three points (i.e. the fact that Allonby was an indirect discrimination case) is key. This is because the half-sentence from the case that the DWP quote in support of their interpretation, which says: where State legislation is at issue, the applicability of that provision vis-à-vis an undertaking is not subject to the condition that the worker concerned can be compared with a worker of the other sex... is actually concerned (if one reads it in context along with the earlier paragraphs) with cases where the individual s complaint is based on statistics which show that the nature of the discrimination is such as to have a greater impact on one sex than on the other. This use of statistics is, by its very nature, only relevant in claims that are based on indirect discrimination, and all the case law bears this out. There is no element of indirect discrimination, however, in the GMP issue. 2 Costs It is difficult to estimate the overall cost of equalising GMPs. Costs would of course cover both an increase to schemes liabilities as well as the administrative costs of implementation. The equalisation method proposed by the DWP would in effect an uplift to all GMPs rather than (as the law requires) in increase to the benefits of the disadvantaged sex. Additionally, there would be the ongoing administrative complexities of recalculating GMPs on an annual basis. We have conservatively estimated that the overall cost to the UK s occupational schemes of applying the DWP s proposed method could be as high as 20 billion.
- 6-3 Impracticality We address your specific consultation questions in the schedule to this response. However, these are subsidiary to the overriding point that pension schemes, their members, the PPF and UK industry cannot afford the consequences of a statutory requirement to equalise benefits for GMPs, for all the reasons set out above.
- 7 - Schedule Responses to specific points raised Here we respond to the specific questions raised in the consultation. 1 Do you think the draft regulations achieve the intended outcome? They appear to do so 3, but that is entirely beside the point. What matters is that the Government should not be seeking to achieve this outcome in the first place, for all the reasons set out in our letter. To reiterate: (a) (b) The consequences of requiring schemes to equalise their benefits for GMPs would potentially be very grave. There is no established existing requirement on schemes to do this (regardless of the contrary impression that the consultation conveys). 2 Do you have any comments on the proposed methodology? It is imperative that these regulations are not introduced, for the reasons stated in 1 above. The only satisfactory outcome will be for the Government to withdraw them, in which case the proposed methodology will simply fall away. If however the Government persists with these changes, then the proposed methodology will still only be of limited relevance. The statutory equalisation requirement will be the one set out in the regulations, and precisely what that requires will then become a matter of law regardless of the methodology the DWP has suggested. That said, we do have serious concerns about the methodology in its current form, which can be summarised as follows: (i) (ii) Equalising has only ever required levelling up of the disadvantaged sex. It cannot be right to propose a method whereby both sexes benefits are increased over time. This would be doing more than could required by equalisation law (and so in most cases would be a breach of trust). We can see no justification in equalisation law for the year-by-year approach in the methodology. We consider the pension needs to be looked at more holistically. So, equalisation uplifts in earlier years (typically for men) ought, at the very least, to be set off against subsequent years benefits (as if they were advance payments of those subsequent years benefits) albeit not so as to reduce the subsequent years payments to less than the pensioner would have received had they been of the 3 This is subject, however, to one important qualification. It is intended to introduce these regulations under section 2(2) of the European Communities Act 1972; as the proposed introduction of a specific requirement to equalise for GMPs (with no comparator requirement) goes further than established EU law requires, this raises the question of whether the 1972 Act power is wide enough to permit this; if not, then the regulations will be ultra vires. We presume that the Government has taken its own legal advice on this.
- 8 - opposite sex - so that one sex, at least, receives in total only what they are owed, and only one sex uplifted. In the first example in the methodology paper, this would mean the male pension from age 65 (i.e. for years 65 and 66) would be reduced by the equalisation uplifts he had received between ages 60 65 (but not to below the equivalent female pension for years 65 and 66) and the equivalent female pension would not require equalisation uplifts to the same degree for years 65 and 66. The net result should be that assuming they live long enough, one sex receives (in total) their entitlement under the rules and GMP requirements, and one sex (only) is uplifted. 3 The Government would be interested in whether respondents think publication would be of assistance to schemes. A published methodology is probably better than none at all, so long as it is workable and does not further exacerbate the wholly avoidable cost and administrative headaches that introducing an unnecessary statutory GMP equalisation requirement would inevitably cause. Ultimately, however, this is a side-issue. The important point is not to introduce these regulations (for the reasons set out above), and then no methodology will be needed. 4 The Government would be interested in any other suggestions as to what it could do to assist schemes in dealing with their equalisation duties. The Government can best assist schemes in dealing with their equalisation duties by not introducing those duties in the first place. This is not intended to be a flippant remark. This consultation exercise is misconceived as it appears to be based on the false premise that these equalisation duties already apply under EU law, whether the Government introduces them or not. As we have explained in our letter, that is not settled law and the consequences of introducing such requirements are likely to prove very serious. 5 The Government would be interested in whether anyone thinks there could be an adverse impact on the position of disabled people from these changes. As noted above, a large number of people can expect to be adversely impacted by these changes. A proportion of these will inevitably be disabled. It is a sad fact of life that disabled people also tend to be financially the most vulnerable. 6 The Government would be interested in whether anyone thinks there could be an adverse impact on the position of men or women from these changes. Men and women both stand to lose from these proposals. There are two main reasons for this, both of them resulting from the unsustainable financial burden that the proposed equalisation requirements would place on a great many schemes (and, therefore, their employers).
- 9 - In short, these consequences are: (a) (b) job losses; and benefit cutbacks when schemes have to be wound up with insufficient funds and no employer. The PPF provides only limited compensation, and is likely to be under greater strain than before as more schemes are admitted to it (as a consequence of the GMP equalisation costs) and fewer schemes remain outside of the PPF to pay the levy. Paragraphs (a) to (e) at the start of this letter present a slightly fuller outline of what would happen. We would also observe that the practical difficulties for pension schemes that seek to hedge risks by buy-ins or longevity swaps, for example, are likely to be increased by GMP equalisation. A number of schemes may be unable to implement such risk reduction exercises, or at least have to defer them for a long period, meaning greater risk exposure for both employers and members. **** **** ****