Author: Mark Williams
One of the key reasons why this is the case is because of the inherent complexities involved in fixing historical issues and setting things straight for the future, complexities that are particularly striking in the area of Guaranteed Minimum Pension (GMP) equalisation.
GMP equalisation can seem daunting – requiring thorough, time-consuming data analysis and complex calculations – meaning it’s not always seen in the most positive light. However, we are now seeing more recognition that it is achieving beneficial results. Trustees and other stakeholders are even starting to feed back that they are pleased with the outcomes of the process and feel it has been worthwhile. Indeed, I’ve had two pieces of feedback along these lines from Gallagher clients just in the last week.
While for many members the impact of GMP equalisation has been small, for some the impact of correcting their benefits (including related data changes) has been significant, with back-payments occasionally exceeding £10,000. This isn’t a random windfall for these members – it is money that they are properly owed – and this project has put that right.
Moreover, GMP equalisation has been a catalyst for addressing a huge range of historical data issues, the impact of which extends way beyond this specific project. Many schemes had never quite managed to bite the bullet on these data issues, and GMP equalisation – in conjunction with the pensions dashboard project and the more realistic prospect of completing bulk annuity transactions – has finally provided them with the impetus to do so. The positive impact of these data enhancements will be realised for years and decades to come.
It somehow gets forgotten amidst all the complexities, but it’s vital to remember that GMP equalisation is ultimately all about equalisation – making benefits consistent and fair between men and women. No longer will these pension benefits differ purely based on someone’s sex. This equality is something worth striving for and is something we should rightly be proud of achieving.
Of course, we haven’t quite achieved it yet for all schemes – not least because of the work required for past transfers and other past members, which will take many years and involve a particularly strong dose of pragmatism. However, we can be proud of our progress as we look forward to achieving more.
GMP equalisation
GMP equalisation provides an opportunity to assess where we’ve got to in achieving sex equality across the UK pensions industry.
Note that the focus here is on ‘structural’ inequality in the pension schemes specifically – i.e., features of the schemes that lead directly to inequality in the benefits received. It is important to recognise that even if all pension schemes provided exactly the same benefits to men and women, there would still remain inequality in the average pensions received by men and women - the ‘Gender Pensions Gap’, which is currently estimated by the Department for Work & Pensions (based on 2018-2020 data) at around 35% - i.e. on average women receive 35% less than men. The main reasons for this are:
- The knock-on impact of the Gender Pay Gap
- Women historically completing fewer years of pensionable service than men (having been more likely to work part-time or take time away from employment)
- The prevailing impact of past inequalities in the State Pension and occupational pensions
While the broader inequalities that drive the Gender Pensions Gap are outside the scope of this article, if we do at least fix ‘structural’ inequalities in our pension schemes going forwards, this should support a narrowing of the overall gap over time.
So, let’s start with Defined Contribution, on which we’re doing fairly well. Auto-enrolment has significantly expanded the membership of these schemes across all demographics. Levels of contributions might often be too low to achieve a strong level of retirement income, but they at least have to be set equally for males and females. At retirement, the options available do not differ based on sex, and insurers have had to offer the same annuity rates to males and females since December 2012. So – as I’m treating equality within the salaries on which contributions are based as outside of the scope of this article – I’m going to suggest that we are in a good place on DC.
What about the State Pension? Since 2018, the State Pension age has been aligned for males and females, meaning we can say equality has been achieved looking forwards. However, here our celebrations are cut short by the significant historical issues that remain, specifically in relation to the “WASPI” women. Until these matters are resolved, we obviously can’t call this a ‘win’.
Which then takes us back to occupational Defined Benefit schemes (in the public and private sectors). Ever since May 1990 and the ‘Barber’ judgment1, pension eligibility and benefits have had to be equal between men and women – which thanks to the 2018 Lloyds judgment2 now includes GMPs. However, even after GMP equalisation, one area of DB inequality remains. Many DB schemes continue to use sex-specific terms for member options such as transfer values and cash lump sums. There has been a clear trend in recent years towards providing unisex terms (in part because sex-specific terms cause extra headaches for GMP equalisation); however, a significant minority of schemes have not yet done so. As these options form part of members’ benefits, this will mean that (otherwise identical) men and women will still receive different amounts of money.
The primary justification given for retaining these differences in terms relates to differences in life expectancy between men and women. The drivers of these differences are very uncertain, including the extent to which they are due to ‘nurture’ or ‘nature’ effects. Furthermore, the gap has closed considerably over time, such that sex is now arguably a much less significant driver of life expectancy than other socio-economic factors. Given this – and also the comparison with the insurer requirements mentioned above – in my view, it is difficult to justify continuing to offer sex-based terms.
Clearly, the world still has a long, long way to go to achieve sex equality; however, in relation to the UK pensions industry, the finish line is really not that far off. Let us all finally finish what Mr Barber started back in 1990, and make our pensions depend only on our career and savings decisions – not whether we are male or female.
