GMP Equalisation

The Guaranteed Minimum Pension (GMP) has provided complexity to those involved in pensions for years. We have long suspected that one day those involved in the pensions industry will need to take action to deal with the inequalities in scheme benefits caused by GMPs.

While the 2018 Lloyds judgment on GMP equalisation confirms that we have now reached the point where we need to address this particular project, how you do this still remains a decision for individual schemes.  

There are still a number of outstanding issues to consider, such as; the input from HMRC on tax-related issues, whether members who transferred out benefits are still in scope, what does GMP conversion guidance look like etc.

However, there is much that schemes can do now to start to take control of the project.

 

Get in touch with one of our GMP equalisation specialists

So what can schemes do now?

Actually there is quite a lot, but trustees should focus on three things:

  1. Data, data, data – if you haven’t already reviewed your data, understanding the data items you need for GMP equalisation, and potentially, conversion is an important aspect of your due diligence before you start your equalisation activity. If you need to improve the quality of these data items, this is something you can work on right now.
  2. GMP reconciliation and rectification – this still needs to happen, regardless of the course taken on equalisation. Download our guide to find out everything you need to know – click here.
  3. Make a plan – trying to absorb an equalisation programme into the day-to-day running of your pension scheme is going to be a challenge. It is important to ensure you have the right team in place to not only advise on but also to deliver GMP equalisation.

 What are the proposed methods for equalising?

The High Court considered different methods – A, B, C1, C2, D1 and D2. It summarised them as follows:

  • Method A – equalise each unequal aspect separately.
  • Method B – provides the better of male or female comparator pensions each year.
  • Method C1 – provides the better of male or female comparator pensions each year, subject to accumulated offsetting (without interest).
  • Method C2 – provides the better of male or female comparator pensions each year, subject to accumulated offsetting (with interest).
  • Method D1 – compares the actuarial value of the member’s unequalised benefits with those of an opposite sex comparator. If the value is lower, then the member’s benefits could be uplifted.
  • Method D2 – as per D1, but the higher actuarial value is converted to equivalent non-GMP benefits.

The judge agreed the use of method C2 in the Lloyds judgement, but also identified method D2 as viable. Method C2 would create complexity for scheme administrators, with multiple benefit records having to be maintained concurrently (i.e. the actual benefits to be paid after any adjustments plus one for both a male and female comparator). Method D2 is a one-off exercise where all GMP benefits would be converted into non-GMP benefits, although this would require employer consent.

A group of representatives from across the industry has issued a Call for Action by trustees and employers. The group is recognised by the Pensions Regulator and is made up of professionals from the administration, legal, advisory, actuarial, data and trustee sectors. The Call sets out important points and questions that need to be considered and lists actions to take now in preparation for your equalisation project. It can be found here.

GMPs have been part of the pensions landscape since 1978 and, despite various attempts over the last decade to address equalisation issues, it is only now that we seem close to solving the final piece of the puzzle.

Read our five-minute history here.

Connecting with you

Get in touch if you have a question or would like to explore how our solutions could help your organisation.

Get in touch