Accounting for GMP equalisation - 28 years in the making

29 October 2018

It’s unusual for companies to take 28 years to decide how they should account for an event.  But that’s how long it has taken to work out how companies should interpret the May 1990 Barber judgement by the European Court of Justice on providing equal pension benefits for men and women where they are in receipt of Guaranteed Minimum Pensions (or GMPs).  

GMPs were the minimum pensions companies had to provide when they opted their employees out of the State Earnings Related Pensions Scheme (remember SERPS?) between 1978 and 1997, usually through a defined benefit scheme. The problem was that GMPs were calculated by reference to and came in to payment on state pension age, which used to be 65 for men and 60 for women. That made GMPs and actual pensions in payment unequal for men and women and this contravened the Barber judgement.

GMPs’ complex benefit formula came with its own, unique, incomprehensible jargon such as the late earnings adjustment, anti-franking and contracting out. Indeed it was so complex that almost no one tried to equalise GMPs after the Barber judgement and because of this, in retrospect, most pensions and transfer values since then have all been wrongly calculated.

This has all changed now with the judgement on a case involving the Lloyds Banking Group pension schemes that has clarified once and for all how GMPs should be equalised.   In detail, pension schemes must equalise GMPs by uplifting pensions to the same level as far as needed for men and woman. This equalisation is retrospective. The sting in the tail is that how far you go back in time depends on the precise wording of the scheme rules which could be anything from 6 to 28 years.

The changes will bring enormous complexity as administrators will need to ensure that every pension is equalised.  In some years the male equivalent pension will be higher and in others it will be the female pension that is higher.

There will be financial consequences of providing higher pensions too.  Early estimates suggest pension liabilities will increase by around 2% on average or say £20m for a £1 billion pension scheme.   Some industry commentators think the costs could be £20 billion across all UK pension schemes.

PwC’s view is, as this is an increase in the scheme benefits, the £20m above would normally be recognised in the income statement.  However, if companies can demonstrate they had made an allowance for whatever the impact they thought was likely to be (even nil), the £20m is a loss through OCI. This could be a material impact for many companies.  For example, a £20m impact is a lot if company earnings are £50m. Companies will also need to agree with the trustees when the £20m should be cash funded.

Companies are advised to understand the consequences of GMP equalisation.  If pensions are large relative to the size of the business, companies should also prepare themselves for some difficult communications with investors who may be wondering why they’ve had to wait 28 years to find this out.

 

Brian Peters

Brian Peters | Financial Reporting for Pensions Leader, PwC United Kingdom
Profile | Email | +44 (0)20 7212 3353

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Comments

In relation to this comment "However, if companies can demonstrate they had made an allowance for whatever the impact they thought was likely to be (even nil), the £20m is a loss through OCI." What would an allowance include and how would you expect a company to demonstrate this?

"However, if companies can demonstrate they had made an allowance for whatever the impact they thought was likely to be (even nil), the £20m is a loss through OCI."

If an allowance was already made then why would you need to make an adjustment through OCI?

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