British pensioners who opted out of defined benefit pension schemes in the Nineties are set to receive millions of pounds in back payments following a High Court ruling.
Experts believe the change could cost the pensions industry as much as £15 billion after three female members of the Lloyds Banking Group (LBG) pension scheme won a claim for gender equality regarding the level of pension benefits paid to both men and women.
The landmark case involved guaranteed minimum pension (GMP) schemes going back to the 1990s when many people decided to contract out of their defined benefit or final salary schemes with the benefit of paying lower National Insurance contributions and receiving a higher private pension.
But the calculations for how much savers would receive broadly reflected those used for calculating addition stated pension benefits, based on different retirement ages between men – at 65 – and women – at 60.
In most instances women’s contributions have grown at a lower rate than mens’, but as women get their state pension earlier it means some men could benefit.
The High Court ruling by Mister Justice Morgan ordered Lloyds to use a new method of calculation which automatically pays the higher rate of pension to all members and takes into account the value of pension contributions to date.
He also ruled that arrears of 1% over Bank Of England base rate must be paid – a significant sum as these cases go back decades.
Pensions expert Chris Styles said: “The conclusion that there is a duty to equalise GMPs and pay arrears does not come as a surprise, but the implications and potential costs are still very large.
“Most employers and trustees have, quite reasonably, been putting off dealing with this until there is more certainty.”
An LBG spokesman said: “The hearing focused on what is a complex and longstanding industry-wide issue.
“The group welcomes the decision made by the court and the clarity it provides. The group and the pension scheme trustee will be working through the details in order to implement the court’s decision.”
Consultants LPC recently calculated the cost to the Lloyds pension scheme at around £150 million, but estimates for the rest of the pensions industry put the overall cost as high as £15 billion.
But payouts will not be swift as all calculations will all have to be carried out individually on a year by year and case by case basis.
Experts say some people will end up with a relatively small amount whereas for others it could run into an extra £1,000 a year.
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Former pensions minister Steve Webb said: “This is the test case. Everyone’s been waiting for this one. You would expect companies to follow suit now.
“It is good news that this ruling finally provides clarity over this contentious issue. Schemes will need urgent help from government and regulators to know the best way to respond to this judgment.
“Members of company schemes could collectively receive a multi-billion pound windfall, but the complexity of making the necessary calculations means that members will not be receiving cheques any time soon.”