A landmark high court ruling requiring Lloyds Banking Group to equalise pension pay-outs between men and women is set to have significant knock-on effects on final salary pension scheme liabilities.
Following a class-action law suit led by the BTU Union, Lloyds will have to pay up to £150m to compensate the pension shortfalls of female employees, the UK High Court ruled in October.
Whilst being good news for scheme members, the high court’s decision is set to represent a significant challenge for trustees at defined benefit (DB) schemes, predicts Charles Cowling, JLP Employee Benefits’ chief actuary. “We estimate that as a result of this case, the pension liabilities on the balance sheets of the FTSE 100 are likely to increase by approximately £12bn.
“More significant for finance directors is that there is a risk that auditors will require these costs to be a hit to reported profits,” he adds. “Across the whole of the UK we estimate this could hit the profits of UK companies by £32bn.”
If these additional costs will be reported as a loss to profits, the decision could also have an adverse effect on the treasury which could face a loss of up to £6bn in corporation tax receipts, JLT predicts.
The high court’s ruling refers to Guaranteed Minimum Pensions (GMPs) for employees who contracted out of the State Earnings Related Pension (SERPs) scheme between the late 1970s and 1990s. When being contracted out of the state pension, employers have offered staff a workplace pension equivalent, with the levels for female workers being set lower than for male workers due to their earlier retirement age.
“It confirms what has been long known, but ignored by many pension schemes, which is that the elements of pensions known as GMPs contravene gender discrimination rules,” Cowling said.
The high court’s decision is set to provide a significant income boost for millions of women in the UK, BTU predicts, with more than 30,000 members set to see their retirement income increase by more than £500 and several thousands of scheme members expecting an increase of at least £3,000.
The ruling will contribute towards narrowing the gender pay gap in pensions, which according to recent research by trade union Prospect, is still twice the size of the gender pay gap. While women were on average paid 18.7% less than men, they can expect their pension income to be on average £39.5% lower than that of men, the union said.
