Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill - Second Reading

Part of the debate – in the House of Lords at 10:15 am on 25 March 2022.

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Photo of Baroness Redfern Baroness Redfern Conservative 10:15, 25 March 2022

My Lords, it is with great pleasure that I am able to take the Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill through this House. It gathered a lot of support in the other place and I am hopeful that it will have a similarly positive reception here.

In 2019, during the debate on the Guaranteed Minimum Pension Increase Order, the noble Baroness, Lady Drake, asked:

“Will the Government press ahead with their planned changes to GMP conversion?”—[Official Report, 14/2/19, col. 1956.]

In the same debate, Lord McKenzie also asked about guaranteed minimum pension equalisation and conversion. I am very sad to say that Lord McKenzie is no longer with us; he is truly missed in this place. I know that he would have been here today to take part in this debate. The next year, during the Guaranteed Minimum Pension Increase Order 2020 debate, the noble Baroness, Lady Sherlock, asked a similar question and referred back to the original question posed by the noble Baroness, Lady Drake. As a Back-Bencher, I cannot speak for the Government, but I think that the Bill may go some way to answering the question posed by the noble Baronesses and the late noble Lord.

I begin by setting out what guaranteed minimum pensions are and why schemes may wish to convert them at all. The noble Baroness, Lady Drake, will have little to learn from what I have to say, as would the noble Baroness, Lady Sherlock, who I know would have been here but is suffering from Covid.

The Bill will help occupational pension schemes to correct a basic issue of unfairness. It will make it easier for occupational pension schemes to correct people’s pensions to ensure that they do not receive less pension income as a result of the guaranteed minimum pension legislation than they would have done if they had been the opposite sex. In other words, it will help schemes to correct a situation which is fundamentally unfair and which has been agreed to be unfair since 1990.

Guaranteed minimum pensions—GMPs, as they are usually called—were a feature of the UK’s pension system in the late 1970s, 1980s and 1990s. The detail behind the way in which GMPs work is extremely complex, but the basic premise is very simple. An employer who sponsored a defined benefit occupational pension scheme could contract it out of the additional state pension. For service between April 1978 and April 1997, the scheme was required to pay the members a GMP. The intention was that, on reaching pension age, the amount of GMP that an individual member would have built up would be broadly equivalent in value to the additional state pension that they would have received had they not been contracted out.

GMPs have some important features. The GMP legislation requires the payment of a survivor benefit to an affected member’s surviving spouse or civil partner in the event of the member’s death—something which is of great comfort to many people. I will talk about survivor benefits in more detail in a moment.

As well as survivor benefits, GMPs also have indexation and revaluation requirements set out in law. Where these apply, this means that the GMP has to be increased to provide some protection against the effect of inflation. However, as can be the case with pension entitlements, the GMP rules reflect the different values of the past. Men and women qualified for them at different ages and, to reflect this, they also built up at different rates.

The cumulative effect of these different rules is that a man and a woman could start work for the same employer for the same pay and conditions on the same day, work for the same length of time and leave that job at the same time, but, because of the impact of the GMP rules, they may receive different amounts of pension in retirement. Both men and women can lose out on pension income in retirement as a result of their sex. It is not as simple as one sex losing out consistently over another. GMPs were abolished for future service in 1997 and a rather simpler system for salary-related, contracted-out occupational pension schemes was brought in. Contracting out was abolished entirely in 2016. However, millions of people in the UK have GMPs built up during a lifetime of hard work.

It seems difficult to believe now that GMP rules could create different outcomes for men and women. In fact, it was difficult to believe at the time. In May 1990, the European Court of Justice ruled that pensions are deferred pay and, as such, must not differentiate between men and women. In the UK, the Equality Act 2010 requires equal treatment between men and women for all pensions accrued from the date of that judgment. Occupational pension schemes are therefore required to equalise pensions to correct for the unequal effect of GMPs from May 1990 onwards. A High Court judgment in the Lloyd’s case in 2018 also put it beyond doubt that the affected schemes must go back and equalise people’s pensions for the period from 1990 to 1997 to correct the differences caused by the GMP rules.

As some of us here may be beginning to suspect, however, equalising people’s pensions for that period to correct the differences caused by the GMP rules is even more difficult than it sounds. Equalising a pension to correct the differences caused by the GMP rules means that affected pension schemes must go back and correct a person’s overall pension if it is lower, because of the effect of those rules, than it would have been had the person been of the opposite sex. I assure noble Lords that this does not mean taking money away from some people and giving it to others. If it turns out that someone is entitled to more guaranteed minimum pension than if they were of the opposite sex, nothing happens; that advantage is not taken away. It simply means that the scheme needs to increase pensions in some cases where people are losing out because of the way in which the GMP rules work.

However, equalising people’s pensions in this way is proving a slow process. As we have heard, some Members of this House have been talking about this issue for several years. Following the Equality Act 2010, the Department for Work and Pensions tried to help schemes struggling to work out how to equalise pensions to correct the effect of the GMP rules. The department worked closely with the pensions industry. As a result, in 2016, it proposed a methodology for pension schemes to use. This methodology involved converting the GMP into what could be termed “normal scheme benefits”—that is, pension benefits not subject to the complex GMP rules that created the differences in the first place—and carrying out conversions using existing legislation set out in the Pension Schemes Act 1993. Following consultation, the Department for Work and Pensions published guidance on this methodology in 2019. The industry agreed that the proposed methodology was a sensible approach. A member’s converted benefits must be at least equivalent to the value of the benefits pre conversion and must provide a survivor benefit in the light of the valuable survivor benefits that were included in GMPs.

However, the pensions industry has also pointed out that the legislation supporting the conversion process contains some uncertainties that it believes will expose it to legal risk and potential accusations of not equalising correctly. That is why this Bill seeks to amend and clarify the conversion legislation set out in the 1993 Act so that affected pension schemes can better use it to meet their obligation to equalise for the effect of the GMP rules. It does—I very much hope and believe this —exactly what the noble Baronesses, Lady Sherlock and Lady Drake, have been calling for for several years and which the much-respected Lord McKenzie called for.

For example, the way in which survivor benefits are treated in the conversion legislation needs to be clarified. The industry has pointed out that legal requirements around survivor benefits when GMPs are converted are not sufficiently clear in the current legislation. As I mentioned earlier, survivor benefits are the benefits paid out to a scheme member’s widow, widower or surviving civil partner when the member dies; they are therefore extremely important. It matters hugely to many people that their husband, wife or civil partner is protected financially in the event that they pass away. This Bill therefore amends the provisions governing how survivor benefits must be paid after a scheme has converted the member’s GMP.

Similarly, before converting GMP, pension schemes are required to get the consent of the sponsoring employer who funds the scheme. This might look reasonable, considering that the employer has invested a lot of money to ensure that scheme members receive a decent retirement income. Unfortunately, it is not that straightforward, however, because the current legislation does not cover all situations; for example, where the original sponsoring employer is no longer in business.

Finally, the Bill removes the requirement that schemes must notify Her Majesty’s Revenue & Customs when they carry out a GMP conversion exercise. HMRC does not want or need this information; indeed, it has issued guidance asking schemes not to submit it. As it costs schemes money to submit this information, it seems sensible to simply remove the requirement, saving both parties time and money better spent elsewhere.

I should briefly make it clear to the House that this Bill does not ask schemes to do anything new or unexpected; nor does it impose any new costs or requirements on occupational pension schemes or their employers. Affected occupational pension schemes have known that they need to equalise pensions for the effect of GMP inequalities for many years. They should have planned accordingly. The methodology and guidance published by the DWP can help schemes to do this, although it is for the trustees of each scheme to decide which methodology is most appropriate for their scheme. This Bill simply helps pension schemes to use the legislation underlying the department’s methodology and guidance with more certainty in order to correct the effects of a long-standing inequality in the pensions system.

As we have heard, this Bill has been called for in this House for several years. I am delighted to present it for debate today. I beg to move.