Background of GMP equalisation

In the past, UK corporate pension plans could elect to contract-out of the State Earnings-Related Pension Scheme (SERPS – the UK’s second tier of state pension provision), allowing members and sponsors to pay lower National Insurance Contributions. In return, the contracted-out pension plan promised to provide a minimum level of benefits that matched or exceeded the sacrificed state pension amount. This minimum applied for service before 6 April 1997 and is known as GMP.

In its 17 May 1990 ruling in the Barber case, the European Court of Justice (ECJ) mandated employers and pension plans to equalise pension benefits with regards to gender on the grounds that these benefits constituted ‘deferred pay’. Since then, it has remained unclear to what extent this ruling applied to GMPs, which are a benefit provided by the employer in lieu of a forfeited state benefit, and how such an equalisation should be carried out. Most UK pension plans have therefore chosen to delay GMP equalisation and await more clarity on the issue.

Recent UK governments have been convinced that GMP equalisation is required, and it is unlikely that this stance will change following the UK’s departure from the EU.

Recent developments

In November 2016, the Department of Work and Pensions (DWP) initiated a consultation on its proposed method for GMP equalisation. This would consist of a one-off calculation, which would compare the future value of the member’s GMP benefits with what this value would be if they were of the opposite sex. The higher of the two figures is then used, and the GMP benefit is to be converted into a non-GMP benefit. The DWP presented this as a ’reasonable approach’ for schemes to adopt, but did not require that schemes use this method.

In 2017, Lloyds Banking Group filed a claim at the UK’s High Court, seeking clarification as to whether its pension plans are required to equalise GMP benefits with regards to gender in order to comply with antidiscrimination legislation, and what method should be used for the recalculation. The case was heard by the High Court in July 2018 and a ruling is expected before the end on this year. Although the ruling will apply specifically to Lloyds’ pension plans, it is expected that it will set a precedent for all UK DB pension plans with GMP benefits and may establish the industry practice with regards to the methodology used in GMP equalisation going forward.

The impact of the ruling will depend on whether it is appealed, the degree to which it is applicable to other pension plans, its timing relative to companies’ financial year-ends, and other eventualities.

Year-end implications

The effect of GMP equalisation on corporate accounts will depend on the method employed and the specific requirements that may arise from future guidance or legislation. If the Lloyds case results in greater clarity on the matter, auditors will expect companies to prepare a reasonable estimate of the impact of the change in obligations. It is likely that companies will have to recognise additional liabilities in their accounts. With the ruling expected before the end of 2018, this could be as soon as companies’ December 2018 year end disclosures.

It is unclear at this time what the appropriate approach of accounting for GMP equalisation will be. Based on preliminary consultations with audit firms, it appears that auditors are leaning towards treating these liabilities as past service costs in accordance with IFRS and as plan amendments in accordance with US GAAP. If this were the case, auditors would consider the impact of GMP equalisation on DB plan liabilities to represent a P&L charge; recognised immediately under IFRS and amortised under US GAAP.

The impact is very much dependent on individual plans’ benefit structures, but based on our experience to date we might expect to see overall liability values increase by around 1%-4%. For many companies this could represent a significant P&L impact, particularly if reporting under IFRS.

It remains to be seen if there will be any flexibility with regards to how the additional liabilities are recognised. A potential alternative to the above approach would be to treat them as a remeasurement in other comprehensive income, leading to no P&L charge under IFRS. It may also be possible to restate prior year figures on the grounds that there was always an obligation to equalise GMPs.

How can we help

Due to the possibility of a significant P&L charge as a result of the Lloyds Bank court case, it is important to engage with this issue well ahead of the year-end and be prepared for any adjustments that have to be made to disclosures to account for GMP equalisation.

To this end, we have prepared a tool for estimating the impact on the liability value that will allow clients to incorporate consistent predictions into their accounts. Do get in touch if you would like us to investigate the implications for your UK DB plan and look out for (or sign up) for our updates on this and other international topics.