UK - The Pension Protection Fund (PPF) has issued a consultation discussing how trustees of schemes entering the assessment period should approach the equalisation of Guaranteed Minimum Pension (GMP) benefits between men and women.

Under current legislation, the PPF has to ensure equal compensation is paid between male and female members of schemes that have transferred into the fund. But as trustees of schemes are also under a similar legal obligation to provide equal benefits, the PPF said it could, in theory, rely on scheme rules being sufficient for it to meet the legal requirements.

However, the PPF consultation pointed many of the schemes eligible for the PPF have been contracted out of the State Earnings Related Pension (SERPs), and if they were contracted out before 1997 then the scheme is likely to have members entitled to GMPs.

As the GMP calculation is set out in legislation, and has different rules for men and women including different payment ages and accrual rates, this means a male and female member could have exactly the same work history and be identical in every respect apart from their sex, yet still receive different pension benefits.

But the PPF highlighted as there is no agreement about what, if any, action trustees are required to make about this issue, the organisation said it believed "very few trustees" had taken action to "consider how GMPs affect their obligation to provide equal benefits".

As a result, the consultation outlines four possible methods for trustees of schemes definitely entering the PPF assessment period to approach GMP equalisation, which include using a comparator of the opposite sex to calculate an equalised amount of compensation, or amending the scheme rules to achieve benefit equalisation without the need for comparators.  

The PPF recommends a "partial" application of the second method suggested, which is to compare the total male and female pension when it comes into payment, and then annually once the pension is in payment, and then pay pensioners the higher amount.

That said, the "partial" application would mean only benefits paid, accrued rights and revaluations up to the assessment date would need to be equalised, as compensation paid after this date would be subject to the PPF's own revaluation rules.
In addition, the PPF argued the other main approach in using a comparator - someone with identical circumstances but of the opposite sex - would be "difficult and costly" for trustees, and would also "likely result in much greater delays for members in completing the assessment period".

The consultation claimed in "most cases" the increase in the scheme's liabilities by the equalisation would only represent a "small proportion" of total liabilities, although it admitted smaller schemes could suffer "material" administration costs compared to larger schemes.

However, the PPF noted certain categories where the cost of the equalisation would be particularly high or low in relation to their scheme liabilities. For example:

Schemes with normal pension age of 60 are less likely to incur high costs than schemes with older normal pension ages.  Schemes have a normal pension age of 65, the cost of equalization in the main only affects men's benefits, and so if the majority of the membership is female, costs should be contained. Schemes where GMP is a higher proportion of the total benefit are exposed to higher costs. 

Martin Clarke, director of financial risk at the PPF, said: "We believe we have come up with a workable solution tailored to pension schemes being assessed for entry into the PPF now and in the future."

But although it is a legal requirement, Clarke said the PPF wants to ensure a "pragmatic solution", which will minimise the extra burden on trustees as they take their schemes through the assessment process.

"We have strived to strike the right balance between the cost of achieving this solution and ensuring fairness for all our members," he added.

The consultation closes to responses on July 28 2008, and the PPF has indicated it will publish a summary of the feedback received in the autumn.

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