Following a High Court judgement in late 2018, there has been a flurry of activity by schemes and employers to assess the effects on their liabilities of equalising benefits for inequalities between males and females in respect of Guaranteed Minimum Pensions (GMPs) between 17 May 1990 and 5 April 1997. Guidance was issued by the Pensions Research Accountants Group (PRAG) in March this year that gives advice on the effect of these calculations on pension scheme accounts.
In broad terms, the financial impact can be summarised as:
- A liability representing past underpayments (to pensioners and dependants)
- A liability representing higher benefits in the future (to active, deferred and pensioner members and their dependants)
The sum of 1 and 2 should be accounted for in the defined benefit obligation in the employer accounts. In accordance with the PRAG guidance, the first of these should be included in pension scheme accounts of the first period end after the court decision (26 October 2018) unless they are deemed to be immaterial. The second of these will only be dealt with through the scheme’s Report on Actuarial Liabilities.
It has been estimated that the combined financial impact of 1 and 2 is somewhere between 1 and 4% of scheme liabilities for some schemes.
Of this, only part is from the past underpayments and there have been no estimates made of this to date. We have yet to see any scheme accounts including an adjustment, as the effect of past underpayments, has generally been determined to be immaterial.
We have seen employer accounts including the overall effect on their pension obligation as the constructive obligation for the employer arose on 25 October 2018. As most employers had not already included an estimation of the effects of equalisation, this is adjusted for as a plan amendment (without waiting for a scheme rule change - as the High Court ruling created the obligation) and accounted for as a past service cost (in the income statement).