Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill

Chris Smith

Image shows plants growing from three towers of coins to illustrate pensions

The second reading of the Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill in the House of Lords is scheduled to take place on 25 March 2022. Its sponsor in the House of Lords is Baroness Redfern (Conservative).

What is the aim of the bill?

The bill aims to simplify and clarify the legislation that enables occupational pension schemes to convert guaranteed minimum pension benefits into other scheme benefits.

What are guaranteed minimum pensions?

From 1978 to 2002, the state pension consisted of two parts: the basic state pension and the state earnings-related pension scheme (SERPS). Employees gained entitlements to these pensions through national insurance contributions (NICs) paid by the employer and by the employee themselves.

Employers with salary-related occupational pension schemes could contract out their employees from SERPS. Employers and employees then paid lower NICs. Until April 1997, contracted-out employers’ schemes were required to pay at least a guaranteed minimum pension (GMP), of a similar amount to SERPS, when the contracted-out employee reached state pension age.

From April 1997, employers no longer had to provide GMPs for contracted-out members. However, GMP rights accrued before that date were preserved. This means that without further action, schemes would need to pay GMPs to those with relevant accruals.

Why do schemes want to convert GMPs to other current benefits?

Equalities issues: “equalisation”

The Government has said that existing GMP rules lead to unequal outcomes between women and men that, if not corrected, would contravene provisions in the Equality Act 2010.

The discrimination arises because at the time that GMP rules applied (April 1978 to April 1997), the state pension age was 60 for women and 65 for men. This resulted in differences in entitlement to GMPs. For example, a woman’s GMP accrued faster than a man’s, as the payment at retirement would be the same, but her working life was five years shorter. As a result, where a woman and a man have identical work histories, the woman’s overall GMP will be greater than that of the man.

In addition, the woman is entitled to receive her GMP at an earlier age (60) than the man (65). However, the rate at which GMPs in payment increase over time (“indexation”) is lower than the rate at which pre-retirement GMP benefits are increased (“revaluation”). The Government said this means that while a woman’s GMP is paid earlier and is typically initially higher than a man’s, the man’s GMP may overtake that of the woman over time.

The Government stated that these outcomes contravene equality requirements that have applied since 7 May 1990. The date stems from a decision of the European Court of Justice that occupational pensions constitute ‘deferred pay’ and are therefore subject to equal treatment provisions. Successive governments have therefore maintained the position that pension schemes are obliged to “equalise” overall scheme benefits accrued since May 1990. In 2018, the High Court confirmed that pension schemes must equalise benefits to address the unequal effects of GMPs.

Administrative benefits: “conversion”

The Government states that a “conversion” of GMPs to other current benefits would provide help with pension scheme administration, as it would “enable a scheme to adopt a unified and streamlined benefit structure, subject to certain safeguards to protect the members’ interests”.

Previously, in 2013, the then Minister of State for Pensions, Steve Webb, said that it was not possible to convert GMPs into scheme benefits unless they have been equalised to correct for the equalities issues described above.

Existing legislation and past action on equalisation and conversion

The Pension Schemes Act 1993, and an equivalent act for Northern Ireland, the Pension Schemes (Northern Ireland) Act 1993, were consolidation acts that set out various provisions in relation to pension schemes.

The Pensions Act 2007, and the equivalent Pensions Act (Northern Ireland) 2008, amended the 1993 acts to allow schemes to convert GMP rights to other scheme benefits.

Previous governments have attempted to achieve equalisation and conversion via guidance, for example following a 2012 consultation and again after a 2016 consultation. The 2016 consultation proposed to use conversion provisions available in the amended Pension Schemes Act 1993. However, responses to the consultation suggested that the provisions of the 1993 act were unclear in certain respects (as set out in the next section). Respondents said these uncertainties could expose schemes to legal risk and potential accusations of not equalising correctly. Therefore, the current bill proposes to amend the 1993 and 2007/2008 acts with the aims of clarifying the legislation and making it easier to use.

Key provisions

The Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill consists of three clauses. Clause 1 contains the substantive provisions in respect of England, Wales and Scotland. It would amend the Pension Schemes Act 1993 and the Pensions Act 2007 to:

Clarify that the conversion should apply to benefits available to surviving widows, widowers and civil partners if the pension scheme member died before the conversion date.
Replace the detailed requirements regarding survivor benefits in the 1993 act with a power to prescribe in regulations the conditions which must be met in relation to survivors’ benefits.
Confirm that any money purchase benefits accrued as a part of pension benefits are not included in the actuarial calculation to convert GMP benefits into other benefits.
Provide for a power to set out in regulations who must consent to the conversion. This is to tackle the issue of how to carry out a conversion when the scheme’s sponsoring employer no longer exists.
Remove the requirement to notify HMRC of conversions.

Clause 2 contains “mirroring provisions” for Northern Ireland by amending the Pension Schemes (Northern Ireland) Act 1993 and the Pensions Act (Northern Ireland) 2008 in the same ways as described in clause 1.

Private pensions legislation is a devolved matter in Northern Ireland. However, a committee of the Northern Ireland Assembly recommended that the bill should be used to implement the relevant changes to Northern Ireland law. The assembly passed the relevant legislative consent motion on 24 January 2022.

Clause 3 states that the bill would come into force on royal assent, apart from the provisions that require secondary legislation to be brought into force. It also says the bill extends to England, Wales and Scotland, and to Northern Ireland in accordance with the arrangements described above. Finally, clause 3 also provides the bill’s short title.

Government support for the bill

In the second reading debate on the bill in the House of Commons, the Minister for Pensions, Guy Opperman, said the Government supported the bill. He argued the issue was “technical looking” but “extremely important” and that he was “genuinely keen to progress it”.

The Department for Work and Pensions (DWP) has assisted with drafting the bill. It has also written explanatory notes. It has not conducted a risk assessment as the Government believes the bill does not impose “any new costs or requirements on occupational pension schemes or their sponsoring employers”.

House of Commons stages

The bill received its second reading on 26 November 2021. Its sponsor, Margaret Ferrier (Independent MP for Rutherglen and Hamilton West) stated that it would “correct a basic issue of men and women being treated differently”. She said that, in doing so, the bill would not mean anyone had any money taken away. Rather, it was intended that “if one person has a smaller guaranteed minimum pension than another purely because the first person is male and the second female, their overall pension entitlement needs to be corrected”.

She also reported that the pensions industry welcomed the bill and has “long lobbied” for the clarifications it contains.

The then Shadow Secretary of State for Work and Pensions, Jonathan Reynolds, said the Labour Party supported the bill. Second reading was approved without a division.

Committee stage took place on 2 February 2022. The Shadow Minister for Work and Pensions, Matt Rodda, again said that the Opposition supported the bill. However, he added that the bill should commit the Government to consulting before making regulations under it, for example in relation to calculating survivor benefits and who must consent to a conversion. In response, Mr Opperman stated that “we will consult on those matters. There will be a full consultation among industry to which, obviously, opposition parties and all parts of industry can make representations”. In a subsequent letter to Mr Rodda, Mr Opperman also said the Government would use such consultations to remind pension schemes of the need to “communicate clearly with their members if and when they carry out a GMP conversion exercise”.

No amendments were tabled. As the bill was not amended in committee, there were no formal proceedings at report stage.

Third reading took place on 25 February 2022 and was again agreed to without division.

Tax implications

The pensions industry has called for further clarity on the tax implications of GMP conversion. One practitioner, from pension scheme law firm Sackers, was reported as saying that previous government guidance “stops short of providing a much needed steer” in the area.

In his letter to Matt Rodda following committee stage in the Commons, Mr Opperman said that HM Revenue and Customs has already published guidance on the treatment of key pension tax areas in an equalisation. However, he said that “the tax position regarding the conversion method is potentially more complex”. He stated that DWP would “work closely with HMRC on the wider issues associated with the conversion method”.

External comment

External commentators have broadly welcomed the bill and the Government’s support for it. For example, pension advisory firm Lane Clark and Peacock said that GMP conversion was the industry’s preferred route to carrying out equalisation and that the bill covers the “key areas” where streamlining of the legislation was needed. Insurance broker and adviser Willis Towers Watson (WTW) commented that it was “very encouraging” that the bill had passed through the House of Commons. WTW called for the regulations under the bill that should provide further detail on the conversion process to be published “shortly after (or possibly even before) the bill is enacted”.