(January 20, 2012) — Legislative changes to how companies in the United Kingdom calculate member benefits are unnecessary and will hit plans already struggling with poor funding levels and low investment returns, experts have warned.
A consultation document published by the Department of Work and Pensions on Friday, set out changes to the current working system that would bring legislation on gender equality in pension payments in line with European Union legal standard.
The proposed legislation would see employers offering defined benefit pensions bring the Guaranteed Minimum Pension (GMP) benefit entitlement for men and women in line, following a legal case settled in 1990.
The DWP consultation document set out the reason for the proposed changes: “Most scheme members accrue benefits in excess of the GMP minimum. However, the different GMP payment ages for men and women can still result in a difference of treatment. Moreover, the rates at which the GMP accrues to men and women can have an effect on the overall amount paid, where the scheme applies different rates of revaluation and/or indexation on that part underpinned by the GMP and the balance.”
Industry participants and affected companies have been asked to respond to the consultation by April. A spokeswoman for the DWP said the government was just offering clarity to employers with these schemes, so they could better adhere to the legislation already established through case law on a European level.
Pension experts have reacted angrily to the announcement, however.
John Ball, Head of UK Pensions at Towers Watson, said: “When employers agreed to finance replacements for state benefits in return for contracted-out rebates, the payments they received reflected the unequal nature of state benefits. Effectively, employers are now being told to fund more valuable benefits than the Government paid them to provide – obviously not something that companies will welcome.”
Ball added: “By changing UK law, the Government is imposing this on employers regardless of how the courts would have interpreted European law. The DWP has suggested a method of equalising benefits that is very much at the expensive end of the spectrum, both in terms of extra payments to members and in terms of administrative costs. Schemes following this approach would have to give each member the better of male benefits and female benefits not only overall but also in each year of retirement. “
Paul McGlone, Principal Consultant at Aon Hewitt, said: “GMP equalisation looks set to be
another headache for UK pension schemes in a year that they are already facing
challenges from low gilt yields, high deficits and auto-enrolment. The main
cause of the headache is European legislation around equal treatment, which now
dates back over 20 years.”
Giannis Waymouth, Pensions Lawyer
at Allen & Overy, said: “The government is
in a small minority of those who believe EU law requires the GMP to be
adjusted. However this proposal attempts to kill that debate – no matter
what EU law requires – GMP equalisation will become compulsory in the UK.
Why couldn’t they let sleeping dogs lie as industry bodies urged them to?
“
The proposal also covers the actions of the Pension Protection Fund, the lifeboat for bankrupt company schemes, but a spokesman for the fund said it had established a way to tackle the issue in November and did not foresee any changes that would have to be made as a result of this latest move.
McGlone concluded: “Attempts to ask the DWP and others to ‘leave well alone’ have not fallen on deaf ears, but they do not seem to be able to stand up to the demands of European legislation. Even though the implementation of GMP Equalisations is fraught with difficulties that will outweigh the benefits, it looks like this is an area where bureaucracy will trump common sense.”