Female members of three Lloyds Bank pension schemes have taken action to enforce what they argued were their rights to equality of treatment in relation to pension benefits. In response, the trustees of the schemes asked the High Court for a ruling on the principal issues. The judgement in Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank Plc & Ors was published on 26 October 2018.

In essence, the disparity of treatment between male and female members of the scheme arose as a consequence of historical legislative change. Between 6 April 1978 and 5 April 1997, UK legislation on state pensions included provisions as to a state earnings related pension (SERPS). It was possible to contract out of SERPS by making alternative arrangements which provided for guaranteed minimum pensions, or GMPs, but the regime created a number of inherent inequalities between men and women.

The result is that there are now many occupational pension schemes that involved contracting out of SERPS which, despite being compliant with the legislation, created inequalities in relation to the benefits available to male and female members of those schemes. It was held by the Court that the pension schemes did show disparity of benefits available to men and women and that there was an obligation to equalise benefits as far back as 1990.

The Court also discussed, amongst other things, which method should be used and the issue of arrears.

Accounting treatment

The impact of the case on the reporting results of some businesses could be very substantial. Determining the appropriate accounting treatment to be applied once the cost estimation method has been agreed will depend on the specific facts and circumstances.

Our understanding of the accounting implications is set out below, although we acknowledge that views may differ.

• Where companies had not provided for equalisation in the past then the additional obligation is considered to arise from a plan amendment, it is accounted for on the date of the judgement, ie 26 October 2018. The past service cost arising from the change in the benefits payable would be recognised in the income statement.
• If the company had previously estimated the cost of equalising GMP benefits in determining prior year’s deficit or surplus, the judgement now has an impact on the amount of the estimate, it is accounted for as a change in estimate. Any loss would be recognised in Other Comprehensive Income.

When the company’s year-end predates the date of the judgement, and those accounts have not yet been finalised, a further consideration is the impact of the increased obligation on the current year accounts:

• If a plan amendment, following on from the discussion above, this would be treated as a non-adjusting post-balance sheet event.
• If, however, an estimate had been made previously, the changes in assumptions would give rise to an adjusting post-balance sheet event.

Disclosure

If the issue is material, whatever decisions are taken regarding the accounting, disclosures in the financial statements should include a clear description of the issue, the accounting treatment adopted and the judgements involved.

Due to the complexities involved in calculating the impact of GMP equalisation, existing disclosure requirements about significant judgements and sources of estimation of uncertainty (in UK GAAP and IFRS) will be particularly relevant in such circumstances.

External resources

Below are links to alternative sources of commentary on the implications of the case for business that you may find useful.

• KPMG Defining issues: UK court ruling could affect pension obligations

• PWC Accounting for GMP equalisation - 28 years in the making

ICAEW is continuing to monitor events and the scope for further guidance.

The Financial Reporting Faculty would welcome views on our analysis of the accounting implications.