Its time to end the last discrimination in pensions says David Brooks, technical consultant at Broadstone Corporate Benefits
With MPs backing a bill to legalise same-sex marriage, it is hard to believe that inequality still exists in pensions so that same-sex couples currently in civil partnerships are often not entitled to the same benefits as a married man and woman.
Pension schemes are designed to pay benefits for the scheme’s beneficiaries over a long time. Often, pension benefits payable at present, or indeed sometime in the near or the not-so-near future, are payable under pension scheme provisions written a long time ago. Pension scheme rules have not always kept pace with the changing requirements of citizens. Same-sex relationships are unlikely to be reflected in a pension scheme’s establishing deed and rules, unless the scheme was set-up after civil partnerships were introduced in December 2005. A scheme’s rules can of course be changed. Many schemes, for example, now provide death benefits for unmarried partners to reflect the fact that such relationships are more prevalent. However, many schemes have done the statutory minimum for those in same-sex civil partnerships, leaving them in many cases significantly worse off in terms of benefits when compared to married men and women in the same scheme.
The issue is within UK legislation. The Civil Partnership Act, which came into force on 5 December 2005, specified how civil partners would be entitled to death benefits across state pensions, public pension schemes, occupational pensions and personal pensions. However, an exemption was created which meant that for occupational pension schemes benefits for same-sex and opposite sex unions need only be provided for benefits that had accrue after 5 December 2005 when it comes to non-contracted out benefits.
The Equality Act in 2010 went further and specified that all occupational pension schemes must have a non-discrimination rule which states that the trustees or scheme administrators must not discriminate, harass or victimise a member or potential member. However, the Act retained the previous exemption so that occupational pension schemes could continue provide a lower benefit to a surviving civil partner than would be payable for a spouse, in relation to benefits accrued before 5 December 2005.
This exemption has created a two-tier system, where a surviving partner in a civil partnership would only be entitled to non-contracted out benefits accrued after 5 December 2005, while a widow would be entitled to a full spouse’s pension. However, the exemption does not apply to public sector schemes, where irrespective of retirement date a surviving civil partner will receive the same benefits as a widow/widower.
Recent court cases have tested the UK legislation and in particular the exemption for occupational schemes. The courts have found that limiting benefits for surviving civil partners contravenes EU legislation, in particular the Equal Treatment Directive, which establishes a framework for equal treatment of individuals in the EU irrespective of their religion or belief, age, disability and sexual orientation.
Now the Government intends to extend the definition of marriage to include same-sex marriage, but has so far ignored calls to equalise pension benefits. This leaves a benefit lottery where the benefits payable differ from scheme to scheme as some rely on the statutory minimum while other trustees, employers and managers may decide to equalise benefits to mirror spousal benefits.
The Government has estimated that two-thirds of schemes already reflect the greater benefit and public sector schemes also provide the greater benefit. Legislating so that the provision is across all schemes seems the next logical step. This can be done without significant cost to the world of pensions but with real benefits to people.
While simplification and deregulation have failed in pensions over recent years, this is an area where one piece of legislation can actually simplify the benefits. This would ease administration costs and more importantly clarify benefits for those who are in a civil partnership and same-sex couples that wish to get married in the future.
Steve Webb must hear this in his quest for a cleaner and simpler pensions system, rather than leave it to individual schemes to take the moral high-ground of permitting the equalised higher benefit.