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GMP equalisation – clarity coming?

Retirement
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By Alex Browning and Sally Minchella | June 22, 2017

The latest in the GMP equalisation story - Government consultation response and Lloyds case.

In March 2017, the Government published its response to the DWP's November 2016 consultation on Guaranteed Minimum Pension (GMP) equalisation. More recently, the Lloyds Trade Union GMP equalisation case has been lodged with the High Court. Alex Browning and Sally Minchella look at whether these developments move schemes and scheme sponsors any closer to resolution on this long-standing issue.

The value-based approach for GMP equalisation

As a reminder, the DWP's November 2016 consultation had proposed a process for equalising the effects of GMPs, which was for schemes to compare the value of the benefits earned between 17 May 1990 and 5 April 1997 (the period subject to equalisation) for each individual member to the value of benefits if the member were of the opposite sex. The higher value was to be taken and converted into a revised form of pension so that the resulting benefits were equal.

The response to this consultation noted a general agreement that this proposed value-based approach was a clear improvement on the more expensive approach previously proposed in 2012.

In our experience the value-based approach has usually been the approach adopted where schemes have needed to equalise GMPs to buyout benefits with an insurer. We have found that this has typically resulted in an increase to a scheme's liability of around 0.5% to 3%, with many schemes towards the lower end of this range. However, the actual impact is scheme-specific and the effect on individual members' benefits within a scheme can vary considerably.

Remaining uncertainties around GMP equalisation

Despite the publication of the consultation and its response, there remain a number of important issues that need to be resolved before most schemes will feel comfortable with pressing on and equalising GMPs:

  • Although the consultation document proposed the value-based approach, the Government has stopped short of providing a statutory safe harbour for schemes equalising GMPs under this methodology.
  • The consultation document was light on detail in relation to the method in a number of areas and the response indicates that the Government will seek to reconvene its working group to consider some points of detail raised in the consultation process.
  • Whilst the Government has reiterated its position that equalising benefits for the effects of unequal GMPs is a legal obligation whilst the UK remains in the EU, it has not confirmed the position following Brexit. This was always likely to be the case, but leaves uncertainty.

GMP conversion

The consultation document sets out a second step, following GMP equalisation, of converting the higher equalised value of benefits into a normal scheme pension, potentially removing the burden of administratively onerous GMPs. This would have a number of potential benefits, for example, simplifying administration, providing increased flexibility for members (e.g. through allowing more early retirements and greater tax-free cash) and potentially improving buyout terms offered by insurers due to the simplified benefit structure. In some schemes these may mitigate some or all of the costs of GMP equalisation itself.

The response noted that the industry had welcomed these proposals to make it easier for schemes to convert GMPs into normal scheme benefits. However, no timeline was given for providing a further update or for implementing changes to the GMP conversion requirements. As primary legislation will be required to make the proposed changes, it seems unlikely these issues will be resolved until April 2018 at the earliest.

How may the Lloyds case impact the situation?

In its consultation response, the Government also identified that it would consider its position on GMP equalisation in the light of any action taken by the Lloyds Trade Union and any legal decisions resulting from that action. That case has now been lodged with the High Court jointly by Lloyds Banking Group, the Lloyds Trade Union and the schemes' Trustees, and is likely to be heard later this year.

It won't just be the Government watching the case with interest. While the case is specific to the Lloyds schemes, it is expected to address the fundamental questions as to whether it is necessary to equalise benefits for the effects of unequal GMPs and, if so, how this should be achieved.

Looking ahead

While the consultation and its response have moved thinking around GMP equalisation forward, the number of remaining uncertainties suggests that few schemes are likely to proceed with GMP equalisation at this stage unless, for example, they are looking to buyout. However, the Lloyds case offers potential clarity in the not-too-distant future after what is approaching 30 years since the original Barber judgment. 

In the meantime, many scheme trustees and sponsors will be grappling with whether to include a reserve for GMP equalisation when funding the scheme, and also whether these recent developments affect a sponsor's financial reporting. 

Trustees should be progressing the reconciliation of GMP data with HMRC, which must be completed by the end of 2018, and consider how best to correct affected members' benefits, particularly if they will need to revisit these when there is further clarity on GMP equalisation.

Scheme sponsors should also be involved in these discussions, for example, to ensure that a cost-effective approach is taken to corrections, with appropriate member communication, and that the project fits with their own liability management strategy.  

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