The Pension Protection Fund (PPF) this week launched a consultation on a proposed method of paying equal compensation to men and women which would otherwise be unequal due to differences in guaranteed minimum pensions (GMPs), primarily a result of differences in state pension age. By law (PA 2004 s.171), the PPF has to ensure that equal compensation is paid to comparable male and female members of schemes in a PPF assessment period or which have transferred in. The PPF has acted on legal advice that this requires equalisation for GMP*.

* The PPF uses the phrases 'Benefit Equalisation for GMP' and 'equalise benefits for GMP' throughout the condoc to refer to the process of equalising individual scheme members' overall benefits, in order to address inequalities created because the formula for calculating GMPs differs for men and women. The condoc deliberately doesn't refer to it as "GMP Equalisation" in order to avoid any possible implication that the PPF proposes to equalise the GMP element itself. The calculation of GMP itself is set out in legislation (PSA 1993 s.14) and cannot be equalised, except following a change in law.

The consequence of the trustees’ statutory responsibilities and the Board's legal advice is that, to complete the section 143 valuation, trustees will have to consider the issue of any inequalities in the GMP calculation, when determining the compensation members would be entitled to if the scheme entered the PPF. The Board believes that trustees will have to choose between two general approaches:

• They must either determine whether a comparator exists for each member and, where one does, calculate an equalised amount of PPF compensation allowing for differences in the GMP formula; or
• They must amend the scheme rules to achieve Benefit Equalisation for GMPs (without determining whether comparators exist).

Four basic methods have been suggested to achieve Benefit Equalisation for GMP for pension schemes:

1. On retirement, the pension benefit should be projected forward for the pensioner and for a comparator of the opposite sex, in order to calculate which sex has the largest net benefit over their expected lifetime. The pension should then be paid as if the pensioner was of the sex that receives the higher amount over that period.
2. The comparison of the total male and female pension should be made when the pension comes into payment, and annually (or more frequently if excess benefits are increased at a different time during the year to GMPs) once the pension is in payment. The pensioner should be paid the higher of the male or female estimate that applies in their particular case at each pension payment date.
3. The comparison of the male and female GMP and the male and female pension in excess of GMP should be made when the pension comes into payment, and annually (or possibly more frequently) once the pension is in payment. The pensioner should be paid the higher of the male or female GMP and the higher of the male or female excess over GMP that applies in their particular case at each payment date.
4. GMP is a partial, but not perfect, substitute for SERPS. If someone's GMP is less than the SERPS it represents then the state will pay an additional pension so that the aggregate amount equals the SERPS amount. Some have argued that the comparison made by the trustees should include the additional pension paid by the state.

The method favoured by the Board, for schemes that have entered an assessment period, is a partial* application of method (2), which results in members receiving the higher of the (overall) pensions payable to two individuals who are equal in every respect except that one is male and the other female. A PPF press release includes a ‘very high-level’ example of how this might be done.

* because the PPF needs only to ensure that benefits revalued up to the assessment date are equalised.

Although this exercise is directed towards a PPF-specific solution, it is a significant step forward with a problem that has largely been avoided since the Barber judgement of 17 May 1990 created a legal obligation for occupational pension schemes to treat male and female members equally, in respect of benefits for service from that date. The DWP's informally-expressed view, that the Equal Treatment Directive does not require equalisation of GMPs so long as overall the benefits are equal, has been regarded as unhelpful in the absence of any guidance from either the Government or case law on how this should be achieved.

Back in October 2003, however, following an earlier consultation the DWP announced that contracted-out occupational pension schemes were to be given the option to convert GMPs into their own scheme benefits, on the basis of actuarial equivalence (see Aries report). This sounded promising, but proved too difficult to include in the Pensions Act 2004. GMP conversion finally appeared in November 2006 (see Aries report ) as s.14 of what became the Pensions Act 2007 - but this has not yet been brought into force; nor have we seen any draft Regs to specify how actuarial equivalence is to be determined. The new initiative by the PPF might at least galvanise this hitherto sluggish process.

The consultation closes on 28 July 2008. Meanwhile, the PPF has had a busy publication week:

New Trustee Guidance

Revised guidance for schemes entering a PPF assessment period has been published for consultation today. Designed to help trustees understand their responsibilities during what the PPF acknowledges is complex and demanding time, the revised PPF 'Trustee Good Practice Guide' explains how the assessment period works as well as setting out the principles the PPF expects trustees and their advisors to adhere to throughout the two-year process.

While assessment takes place, trustees remain in day-to-day control of the pension scheme and payments. The PPF takes over responsibility for payments only when assessment is complete - and if the scheme cannot afford to pay out more than PPF levels of compensation.

The guidance is out for consultation for 12 weeks and, during that time, the PPF is holding a series of roadshows for trustees across the country.

New three year management plan

Also this week the PPF set out its challenges for the next three years, with key activities for 2008-2009, in a new management plan. Strengthening financial resilience is seen as a priority: PPF membership could be similar to the largest pension schemes by 2012.

The main areas of work include:

• consulting on developing the pension protection levy so that it better represents the long-term risk that final salary pension schemes pose to the PPF
• developing a long-term investment strategy to ensure it remains appropriate as levies are paid and more scheme assets transfer to the PPF
• introducing new technologies to streamline the PPF's work, and
• strengthening relationships with all those interested in the work of the PPF.