Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill

Virginia Crosbie Excerpts

3rd reading
Friday 25th February 2022 Commons Chamber

[Margaret Ferrier (Rutherglen and Hamilton West) (Ind)]

I beg to move, That the Bill be now read the Third time.

As I said on Second Reading, the Bill will help occupational pension schemes correct a basic issue of men and women being treated differently in contracted-out defined benefit occupational pension schemes because of the impact of having a guaranteed minimum pension, or GMP. It will help pension schemes to meet their legal obligations and ensure that people do not receive less pension income than they would have done had they been the opposite sex. In other words, it will help schemes to correct a situation that is fundamentally unfair.

I am proud to have brought the Bill before the House. I was delighted to hear the Under-Secretary of State for Work and Pensions, the hon. Member for Hexham (Guy Opperman) announce on Second Reading that the Government would support it. The support that the Bill has attracted from across the House is testament to both its importance and its essential simplicity. It makes a few changes to pensions legislation that will help occupational pension schemes to resolve a long-term issue of unequal treatment.

The pensions industry has itself been asking for the measures in this Bill, and as a result of those measures, schemes will be better able to use the GMP conversion process to correct for the differences in pension outcomes for men and women that have arisen as a result of GMPs. It is very pleasing that hon. Members from across the House have recognised and responded to this need.

For the benefit of those who were not present for the previous stages of this Bill, I will give a short recap of its background and purpose. GMPs are the minimum pension that certain occupational pension schemes must provide to their members. Occupational pension schemes that were contracted out of the additional state pension on a salary-related basis between April 1978 and April 1997 are required to pay their members GMPs as a floor that the occupational pension cannot fall below. The intention was that when reaching the age at which GMPs become payable, the amount of GMP that a member of a contracted-out scheme would have accrued would be broadly similar in value to the additional state pension they would have received if they had not been contracted out. Rather than paying a higher rate of national insurance contributions to build up rights to additional state pension, members of salary-related contracted-out schemes built up rights to a GMP.

However, the way that GMPs were accrued by people means that they differ for men and women, due to historical differences of treatment in the pensions system based on people’s sex. People with the same employment history can therefore have different amounts of GMP depending on whether they are a man or a woman, even if they do exactly the same job for the same length of time at the same salary. Both men and women can lose out on pension income in retirement as a result of their sex: it is not as simple as one sex losing out consistently over the other. I have discussed this issue in this House several times now, and I still find it difficult to believe that people can lose out on even a small amount of pension income purely because of these differences.

Fortunately, successive UK Governments have made clear for over three decades that occupational pension schemes need to equalise pensions accrued since then to correct for these effects of GMPs. The High Court confirmed in 2018 that occupational pension schemes must equalise pensions accrued since 17 May 1990 to address the effects of those differences. Occupational pension schemes are therefore required to undertake a process known as GMP equalisation, correcting people’s overall pensions to ensure that they are not lower than they would have been had the person been of the opposite sex. That is why the Department for Work and Pensions published a suggested methodology based on the overall value of the pension, which relies on the process of converting GMPs to normal scheme benefits. It is elements of this process that the Bill before us addresses.

Unfortunately, correcting people’s pensions in this way is proving a very slow process. There are a number of ways in which the task of GMP equalisation could be approached. One way, for example, would be to look at the pension in each year and compare what a man and a woman would have received, and pay the higher of the two. The problem with this approach is that it would result in members getting more overall than either a man or a woman would have received before the equalisation process. This would have been prohibitively expensive for schemes, and would in itself be unfair.

The DWP, working with the pensions industry, proposed a methodology based on the overall value of the pension, set out in guidance for pension schemes to use. This methodology involved converting the GMP into normal scheme benefits using the existing legislative framework. The industry agrees with that approach, but is worried that the current legislation that supports the conversion process has some gaps that the industry believes will leave it exposed to legal risk or potential accusations that it has not equalised correctly.

For example, we need to clarify the way in which survivor benefits are treated in the conversion legislation. The industry has pointed out that the legal requirements for survivor benefits when GMPs are converted are not clear enough. Survivor benefits are the benefits paid out to a scheme member’s widow, widower, or surviving civil partner when the member dies. Schemes need legal certainty and a clear framework before they can move forward with this process. This Bill seeks to provide that essential certainty to schemes.

[Virginia Crosbie (Ynys Môn) (Con)]

In the last 10 years since it was introduced, the automatic enrolment scheme has enabled 4,000 of my constituents on Ynys Môn to establish a pension. I congratulate the hon. Member on this important Bill. Does she agree that it addresses uncertainties in the current legislation and removes the risk of misapplication?

[Margaret Ferrier]

I thank the hon. Member for her intervention and I absolutely agree. This Bill is set to remove those uncertainties so that these occupational schemes can get on with the equalisation process that they have always known they should be carrying out anyway.

The Bill removes the text in the Pension Schemes Act 1993 that sets out what survivor benefits following GMP conversion must look like, and replaces it with a power to set out those conditions in regulations. When this provision was discussed in Committee, I asked the Under-Secretary of State for Work and Pensions, the hon. Member for Hexham (Guy Opperman) to confirm that the Government would consult on the content of those regulations. I am pleased to say that he agreed to that.

Before converting GMPs, pension schemes are required to get the consent of the sponsoring employer that funds the scheme, which might look to be reasonable, considering that the sponsoring employer has invested a lot of money to ensure that scheme members receive a decent retirement income. Unfortunately, it is not that straightforward, because current legislation does not account for all possible situations, such as where the original sponsoring employer is no longer in business. Again, the Bill removes the requirement for employer consent in the Pension Schemes Act 1993 and replaces it with a power to set out in regulations the details of the relevant persons who must consent to the conversion. I am again pleased to say that the Minister confirmed in Committee that the Government would also consult on the content of those regulations.

Finally, the Bill removes the requirement that pension schemes have to notify Her Majesty’s Revenue and Customs when they carry out a GMP conversion exercise. In Committee, the hon. Member for Reading East (Matt Rodda) very reasonably asked what checks would be in place if HMRC no longer had to be notified that people’s GMPs have been converted into other scheme benefits. I would like to reassure the hon. Member that the removal of the requirement that a scheme must notify HMRC if it converts GMP rights into other rights was requested by HMRC. The notification requirement was not a check by HMRC on whether an individual scheme had carried out a GMP conversion correctly. Responsibility for the accuracy of the conversion lies with the pension scheme’s trustees, and they must take advice on certain matters from the scheme actuary.

The requirement to notify HMRC if a conversion has been carried out is simply a legacy of the time when members of occupational pension schemes paid a lower rate of national insurance if they were contracted out. Because both the employer and the scheme members were paying lower national insurance contributions, HMRC used to need to keep detailed records of all contracted-out schemes. However, when contracting out ended for all occupational pension schemes in April 2016, with the introduction of the new state pension, employers and members no longer paid a lower level of national insurance. HMRC therefore no longer needs to be notified.

As this information is no longer required by HMRC, from 2019 it has said to schemes that it no longer requires them to notify it if GMP conversion has been carried out. However, because it is still a requirement of the Pension Schemes Act 1993, schemes should normally still submit such information to HMRC, despite its having no use or need for it. As I said, it costs schemes time and money to notify HMRC, it costs HMRC time and money to process the notifications, and there is no need beyond the current requirement in the 1993 Act for any of this time and money to be spent.

I reiterate to the House that the Bill does not impose any new costs or requirements on occupational pension schemes or their sponsoring employers. As I said, affected schemes have known that they need to equalise pensions for the effect of GMP for many years, and they should have been planning for equalisation. The Bill will simply help pension schemes that decide to use GMP conversion to do what they need to do to ensure payments are fair. I have engaged positively with representatives from the pensions industry, who have long called for these changes and welcome the Bill’s provisions. I am extremely pleased and proud that my Bill will help schemes that want to use GMP conversion to correct for the effects of this issue, and I am delighted by the cross-party support I have received so far and again today.