On 26 October 2018, the High Court provided long awaited clarity for trustees and employers around the issue of inequalities in the treatment of men and women arising from their Guaranteed Minimum Pensions (GMPs).
The ruling has come in response to proceedings brought by the trustee of three Lloyds Banking group pension schemes following a discrimination claim by female members of the schemes. Under these proceedings, the claimants sought to enforce their right to the equal treatment of their pension benefits. The GMP element of a pension can be unequal between men and women for a variety of reasons including because it accrues at a different rate between men and women and due to how GMP is increased and revalued.
Who is the judgement relevant to and what is its impact?
The judgment is relevant to occupational pension schemes that were contracted out on a salary related basis between 17 May 1990 and 5 April 1997. It sets out a clear obligation on trustees to ensure that there is equality in the pension benefits provided to men and women who participated in a contracted out scheme between those dates.
Where the GMP element of pension benefits had not been equalised already, some actuaries are predicting there could be an increase in the gross scheme liability of up to 3%. There is no single prescribed way of computing the equalisation calculation; however, a range of methods were confirmed as permissible by the court.
What are the possible accounting implications?
There are two key accounting questions:
- At what point in time must the pension obligation include an allowance for GMP equalisation?
- How should any increase in the pension obligation be accounted for?
To answer these questions, it is necessary to understand the approach taken by the scheme’s actuary in previous accounting periods.
Pension obligation already includes an estimate for the effects of equalisation
A few defined benefit pension schemes have already included an estimate of the effects of equalisation in the measurement of their pension obligation. This might be the case when, for example, a scheme rule already required equalisation, or where the scheme had committed to equalise benefits prior to the High Court ruling.
In these cases, we would generally expect the reporting entity to consider whether the High Court ruling provided any additional information that would enable the estimate of the cost of equalisation to be refined. This may be the case, for example, if the actuary had used an estimation method that the High Court concluded was inappropriate (in this circumstance, we should expect the actuary to re-calculate the effect of equalisation using a permissible method). Any revision to the estimate would be recognised through ‘Other Comprehensive Income’ (OCI) as a change in actuarial assumptions.
In our view, a revision to estimates resulting from the High Court ruling is an adjusting post-balance sheet event. Therefore, it should be factored into the balance sheet pension liability regardless of whether the entity’s reporting date is before or after the High Court ruling date of 26 October 2018.
Where this scenario is considered most appropriate, it should be noted that the entity’s auditor will likely be looking for evidence that a previous estimate had indeed been made and that the estimate was reasonable.
Pension obligation does not already include an estimate for the effects of equalisation
Based on our discussions with various stakeholders, we expect most reporting entities will not have previously included an estimate of the effects of GMP equalisation in their defined benefit pension obligation.
In these cases, it is our view that the High Court ruling creates a new constructive obligation for the scheme to equalise benefits. Therefore, including equalisation in the pension obligation for the first time should be treated as a ‘plan amendment’ and accounted for as a past service cost (ie recognised in the income statement). The effects of plan amendments are recognised from the date that they become effective; in this case, the High Court ruling date of 26 October 2018. It is not appropriate to wait for a formal change in scheme rules before recognising the effect of the equalisation obligation.
For periods ending on or before 25 October 2018, the High Court ruling would be a non-adjusting post-balance sheet event, which would require the reporting entity to disclose information about the High Court ruling and also provide an estimate of the effects of equalisation, to the extent that is reasonably possible.
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