What’s it all about?

    On 26th October 2018, The High Court ruled that Lloyds Banking Group’s Scheme Trustees were required to equalise Guaranteed Minimum Pensions (GMPs) through other scheme benefits.

    But what does that mean for Pension Schemes in a similar position to the Lloyds Banking Group Scheme? There’s been a lot of uncertainty. And that’s why PRAG have put together a paper to guide trustees and their advisers through the additional financial statement disclosures that are needed, and tell them how to spot any liabilities.

    We’ve summarised the key points below. And if you have any questions, as always, we’d love to chat.

    Who’s affected?

    Any pension scheme that provides GMPs to members and was contracted out of the State Earnings Related Pension Scheme (SERPS) between May 1990 and April 1997.

    If you’re a scheme trustee, it’s up to you to find out whether you fall into that category. And then you’ll have to determine the level of disclosure required in the financial statements.

    Determining the level of obligation arising

    You only need a reliable estimate of the obligation if it’s considered it will be material to the Scheme. To decide this, we recommend carrying out an initial high-level assessment of the likely obligation.

    These estimates would be expected to be determined by the Scheme Actuary, or for the purposes of the employer’s financial reporting.

    The obligation may arise in respect of backdated payments and interest following the equalisation of Scheme benefits. And it should be recognised in the pension scheme financial statements, where it can be measured reliably.

    The method used to determine the obligation is to be selected by the Trustees. The Court ruling considered multiple approaches, with the following being the favoured methods:

    • A yearly check of members’ pensions paid to date. This will determine if this figure would have been higher if the member were of the opposite sex. And if this was the case, a pension uplift will be applied.
    • The equalisation and conversion of GMPs into main Scheme benefits on a value basis. This is likely to be the favoured method as it would only need to be completed once, rather than annually.

    The judge didn’t rule out other methods of calculating the obligation. However, the method chosen by the Trustees should result in ‘minimum interference’ to those involved, including the employer.

    Disclosures and obligations to be included in the Scheme financial statements

    There are various scenarios which could arise following the initial high-level assessment described above. We’ve looked at the most likely outcomes and included details of how these are dealt with below.

    The following suggested disclosures apply to Scheme financial statements with a period end after the ruling date of 26th October 2018.

    • If an initial high-level assessment has estimated that the liability is not material to the Scheme, it’s not necessary to include the liability in the financial statements. However, the Trustees should consider if they wish to explain this approach in the financial statements, i.e. costs to equalise GMPs will be incurred by the Scheme but have not been disclosed on the grounds of being immaterial.
    • Another possibility is that the liability has not been reliably estimated at a member level at the year-end date, due to the time required to complete the detailed calculations. In this case, the Trustees should seek to obtain an appropriate, reliable accounting estimate for the financial statements, which doesn’t look in to member detail.
    • Where the costs have been reliably estimated at the year-end, either at member level or just at the financial statement level, consideration then needs to be given as to whether the estimate constitutes a liability or a provision in the financial statements.

    This can be decided by looking at the following:

    • The quality of the data used to determine the liability
    • The method agreed and used to calculate the amount due to be paid to members
    • Assumptions adopted
    • Range of results produced by the assessment of the obligation

    The SORP does not provide guidance on accounting for provisions. The PRAG paper suggests any amounts determined as provisions should be shown separately on the face of the Statement of Net Assets, enabling users to see it’s not part of the current liabilities figure. Additional disclosures are also required for provisions; these are detailed in the full PRAG paper and FRS 102 guidance.

    For all details and suggested disclosures for each possible scenario, take a look at the full PRAG guidance paper published in March 2019.

    To wrap it all up

    The advice provided by PRAG has enabled Trustees and their advisers to adopt a consistent approach to the obligations arising in Pension Scheme financial statements, following The High Court ruling made in late 2018.

    The judgement didn’t deal with the following points:

    • Whether a de minimis approach could be adopted (i.e where cost would outweigh benefit to members)
    • Whether the obligation to equalise GMPs extends to benefits which have been transferred out

    Therefore, a second hearing will be held to address these issues and any further points which arise between now and when the second hearing is held. Although a date hasn’t yet been set for when this’ll be, you can rest assured we’ll be able to answer any questions you have about the changes, as and when they happen.

    Take a look at our latest blogs here: Process Mapping Helping Clients & Q&A on Trusts.


    HELEN SCOTHERN, Pensions Director

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