How to achieve pension equality, if that is what is required, is the most complex question raised in the proceedings and the one that’s taken up much of the Court’s time The actuaries and lawyers have identified four possible methods, three of which have possible variants. I’m afraid there’s no way to make any of this either easier or more exciting!
The methods and the key issues are:
- The core idea of Method A is that you compare the pension of an analogous male and female member each year. In almost every year, they will both get an increase; whichever is the higher increase, you pay it to both. Our preferred method is what has been labelled A3 (no-one is arguing for A1 or A2 as the correct answer, but A3 starts from A1 and then builds on it). Under Method A3, you pay the higher increase each year as in A1; but having done so, you recognise that the equalising increase you have just added is not GMP. In the following year, you go through the process again. GMPs typically increase at a lower rate than the excess over GMP; because you have ‘banked’ last year’s equalising uplift as excess over GMP, the equalising uplift also receives the more generous non-GMP increase.
- Method B is the proposal that the Government put forward in 2012, which caused such huge alarm in the pensions industry. Quite simply, what you do is calculate the member’s pension each year when an increase is due; at the same time you calculate what the pension would be if the member were of the opposite sex; and you pay the higher. We are arguing for method B as a fall-back. The essential difference between A3 and B is that under A3, you ‘bank’ each year’s equalisation uplift as an increase in excess over GMP. The Banks reject Method A in all of its variants, and Method B, on the basis that they overcompensate members. They end up with a higher pension than either the unequalised male or the unequalised female pension.
- Method C2. Under this method, you calculate annual increases in the same way as Method B, but instead of automatically paying the higher pension to both members, you also look at the accumulated value of the pension paid to date. If a member has had his or her pension increased in one year in order to achieve equality, but if in the following year Method B equalisation would require the increase to be applied the other way round, in the second year you don’t increase the disfavoured sex’s pension at all – you only do so once the earlier year’s equalisation increase has ‘caught up’. In this way, what you are actually doing is equalising pension paid so far, rather than pension paid each year. That avoids the overcompensation that the Banks want to avoid.
- Method D is what the Government consulted on in 2016. The scheme actuary doesn’t calculate pensions payable each year: instead, he or she calculates the prospective value of the male and female pension that will be paid between now and the date of the members’ (actuarially guesstimated) death. You deduct the lower actuarially assessed total from the greater, and you pay the difference to the disadvantaged member as an actuarially assessed addition to their pension.
Once the Court has come to a decision on whether equality is required, it must then decide which method, from those set out above, achieves that objective best.