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GMP equalisation – an employer’s update

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By Richard Lawson and Richard Nicholas | October 4, 2018

Richard Lawson and Richard Nicholas focus on the preparations employers can make in advance of the judgment.

The spectre of GMP equalisation has lurked behind the pensions industry for over 28 years. The Lloyds GMP equalisation case was heard by the High Court over the summer and seeks to answer two important questions - is GMP equalisation necessary, and how should it be done? The outcome will have big implications for UK pensions. Richard Lawson and Richard Nicholas focus on the preparations employers can make ahead of the judgment.

Background

The Barber judgment of 17 May 1990 confirmed that schemes have to provide equal benefits for men and women. However, the rules for guaranteed minimum pensions (GMPs) are set out in legislation and so it was unclear whether the Barber judgment applied to GMPs. These GMPs differed between men and women as they reflected the different state pension age for men and women at that time. 

The DWP has previously conducted a number of consultations on possible methods for equalising GMPs but have historically stayed short of saying schemes needed to equalise by suggesting schemes take legal advice on this matter. It has always remained a subject of debate that equalisation is necessary, and there is little consensus on how it should be done. 

Over the summer, the trustee of the Lloyds’ pension schemes went to the High Court to clarify the position for its schemes. The judgment could be handed down at any time and may provide some of the answers. Whatever the outcome, it should provide legal clarity and direction that has so far been lacking on this complex issue.

What might happen?

It’s worth reflecting on three possible outcomes of the judgment.

  • Outcome 1 – the court decides GMPs can remain unequal. This would be the easiest and cheapest outcome from an employer’s perspective. Schemes can continue to operate as before and there would be legal clarity on benefits going forward.
  • Outcome 2 - the court could decide that GMPs should be equalised, but not how they should be equalised. This is potentially the most awkward outcome. Equalisation will need to happen, but the cost will remain unclear until an approach has been determined.
  • Outcome 3 - the court decides that GMPs should be equalised and confirms the method(s) that must be used. This will provide the most clarity, although employers may still need to agree with trustees which equalisation method to apply if the judgment permits more than one.

It’s worth bearing in mind that any judgment could be appealed. This means the pensions industry could have more time to digest the implications and plan appropriately.

What preparations could employers make now?

Trustees are responsible for paying the correct benefits to members and it may be necessary to make significant administration changes if GMPs have to be equalised. Employers should consider how to support trustees now and start to think about how to plan for the consequences themselves.

  • Collaboration with trustees: it may be necessary to agree the GMP equalisation method with trustees and the approach to any overpayment/underpayments. Employers may be keen to review communications to members and seek reassurances on updates to processes. These issues will have significant implications for costs and will need to be carefully managed by sponsors. Employers may want to consider how they will interact with trustees in the future and what decisions they would prefer to be consulted on.
  • Financial reporting: it is likely that auditors will require sponsors to allow for GMP equalisation within their DBO/PBO at the year-end. There is a real possibility that this will need to flow through the Profit and Loss account. For many, data limitations, the complexity of the necessary calculations and tight timescales may prevent an accurate valuation in advance of 31 December and an estimate will be needed. For the time being, employers may want to get a high-level estimate of the impact to put the issue into context. Full calculations or a more accurate estimate can follow later once there is more clarity on the method. It will be interesting to see how auditors respond to the judgment.
  • PPF levies: equalisation will have an impact on benefits eligible for the PPF, which will feed through to PPF levy amounts.
  • Scheme funding: it is likely that trustees will want to include a GMP equalisation reserve in funding valuations. While an accurate estimate is difficult without a confirmed methodology or full calculations, sponsors part way through negotiations should consider introducing a broad GMP equalisation reserve.
  • Ongoing risk reduction exercises: employers should consider whether to rethink the approach or timeline to liability management exercises, such as PIE or ETV, and consider the terms for bulk annuity transactions until they have greater certainty.
  • Other GMP projects: it will be necessary to consider how GMP equalisation fits with ongoing GMP reconciliation projects, and whether there is an opportunity to convert GMPs into non-GMP benefits to remove GMPs from the scheme altogether. Employers may want to discuss these opportunities with their advisers.

Summary

GMP equalisation has been an issue for a long time. The hope is that the judgment will, at last, provide some clarity on this thorny issue. Whilst the need to equalise would be unwelcome for most employers, taking appropriate steps now can help mitigate issues and ensure that GMP equalisation is implemented as efficiently as possible.

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