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Everything you wanted to know about GMP but were afraid to ask

Pensions Corporate Consulting|Pension Board and Trustee Consulting
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February 5, 2019

Guide to all questions you may have in relation to GMP Equalisation.

1. What is a contracted out pension scheme?
2. Why did schemes choose to contract out?
3. What is GMP?
4. How might GMP benefits differ from other scheme benefits?
5. How is GMP calculated?
6. What is the difference between the levels of male and female GMP?
7. How does GMP create inequality in members’ benefits?
8. How might this affect my state benefits?
9. Didn’t most schemes equalise benefits in the mid-1990s?
10. What was the Lloyds case about?
11. What are the principles behind GMP equalisation?
12. Who is affected/not affected by GMP equalisation?
13. What about previously transferred benefits?
14. Could any members be worse off as a result of equalisation?
15. What are the different GMP equalisation methods and how do each of the different methods work?
16. Can the period for which back payments are due, be limited?
17. Why is GMP equalisation so complicated?
18. What is GMP conversion?
19. What does a dual record keeping approach involve?
20. What are the links with other projects around GMP?
21. How long will it take to resolve?
22. What is the likely impact of GMP equalisation on scheme funding?
23. Why is the scheme impact typically 0–3% but member impacts could be more than 10%?

1. What is a contracted out pension scheme?

Until 5 April 2016, the State pension was made up of two parts – the Basic State Pension, and an Additional State Pension based on earnings. The additional earnings-related pension was known as the State Earnings-Related Pension Scheme until 5 April 2002, and later replaced by the State Second Pension until 5 April 2016.

It was possible for defined benefit occupational pension schemes to ‘contract out’ their members from the State Earnings Related Pension Scheme (SERPS) if they provided at least a minimum level of benefit to members through a workplace pension.

Contracting out ceased from 6 April 2016 when the State pension moved to a single tier pension.

For a defined benefit occupational pension scheme, it was not possible to contract out on a member-by-member basis. Schemes either needed to have all members contracted out or have all members “contracted in” – i.e. all members received the additional state pension as well as scheme benefits.

2. Why did schemes choose to contract out?

Employers received benefits from the government if they opted to contract out workers from SERPS.  Members of contracted out pension schemes, and their employers, would pay a reduced or redirected rate of National Insurance contributions in return for contracting out of the Additional State Pension.

3. What is GMP?

Guaranteed Minimum Pension (GMP) is the minimum guaranteed level of pension, which a pension scheme had to provide to members if they were contracted out of the SERPS between 6 April 1978 and 5 April 1997.

4. How might GMP benefits differ from other scheme benefits?

If a scheme was contracted out, some or all of a member’s pension accrued between 6 April 1978 and 5 April 1997 will be made up of GMP. 

GMP was designed to replicate the State benefits given up. Therefore there are different statutory rules surrounding how GMP must be treated, compared to other pension benefits provided by an occupation pension scheme. Some of these differences are set out below:

  • GMP accrues at a different rate from scheme benefits.
  • GMP payment age is 60 for females and 65 for males, which may differ from the normal retirement age of the scheme or indeed the age at which a member chooses to take their benefit (i.e. early or late).
  • GMP accrues at different rates for males and females. This is due to the female member having a shorter period prior to payment age to build up the GMP and therefore, generally, female GMP is higher than an equivalent male.
  • If you have two members who are identical in every way except their gender, their total pension at date of leaving would be the same (unless it is all GMP).  The only difference is the proportion of this pension which relates to GMP.
  • GMP often receives a higher revaluation rate in deferment than non GMP benefits.  This rate depends on when a member has left contracted out service.
  • For GMP accrued prior to 5 April 1988 there is no duty to provide inflation linked increases in payment, however for GMP accrued from 6 April 1988, schemes must provide inflation-linked increases in line with CPI up to 3% (previously RPI prior to 2010). There is no statutory requirement to provide increases on non-GMP pension accrued prior to 6 April 1997, however some schemes chose to provide an increase on this pension under their scheme rules.
  • Survivors’ benefits on GMP differ for widows from that provided to widowers, surviving civil partners and same-sex spouses.
  • There are statutory restrictions on transfers of GMP benefits as well as commutation of GMP benefits for cash.

5. How is GMP calculated?

The Guaranteed Minimum Pension calculation was set to provide members with a pension that was at least as much as that which they would have earned under the SERPS, payable from their GMP payment age, i.e. 60 for females and 65 for males (in line with the State Pension Ages during that period).

The calculation of GMP takes into account relevant earnings of the individual and the period of qualifying service during which the member was contracted out. 

For the purposes of calculating GMP, qualifying service is calculated based on Working Life which is given by the following formula:

Number of complete tax years since 6 April 1978 in the member’s working lifetime (which is between age 16 and 65 for men, and between 16 and 60 for women).

Broadly:

For GMP accrued prior to 6 April 1988
GMP accrued at a rate of four-times working lifetime, applied to each tax year’s relevant earnings from 6 April 1978 to 5 April 1988, revalued to date of leaving contracted out service.

For GMP accrued from 6 April 1988
GMP accrued at a rate of five-times working lifetime, applied to each tax year’s relevant earnings from 6 April 1988 to 5 April 1997, revalued to date of leaving contracted out service.

6. What is the difference between the levels of male and female GMP?

As defined above, Working Life is given by the following formula:

Number of complete tax years since 6 April 1978 in the member’s working lifetime (which is between age 16 and 65 for men, and between 16 and 60 for women).

This means that qualifying service for GMP is a maximum of 44 years for females and 49 years for males (the lower service period for females reflected the shorter working lifetime given their lower GMP payment age). A female’s GMP therefore accrued at a faster rate than that of her male counterpart, for the same period of service.

As noted previously, at date of leaving contracted out service, the member’s total benefit is unaffected by whether the member is male or female (provided that there is sufficient pension to cover the GMP). The only difference between the two genders is that female members generally have a larger proportion of their benefits as GMP.

7. How does GMP create inequality in members’ benefits?

GMP is accrued at a higher rate for females
On leaving service a female will have built up a greater amount of GMP requirement than that of her male counterpart. Therefore, for a male and female with identical period of service and pension on leaving, the proportion of pension relating to GMP is higher for a female.

GMP is payable at different retirement ages
GMP is available from 60 for a female.  For a man it is only available from 65. This tends to favour females, particularly due to the large statutory late retirement uplift applied to GMP pension that is applied after GMP payment age, but depends on whether the GMP can be taken independently of other scheme benefits.

GMP revaluation in deferment
Generally a higher revaluation applies to GMP than non-GMPs. Therefore, for a male and female who have accrued the same pension from a scheme, the revaluation of a female’s deferred benefit is generally higher until age 60, reflecting the higher proportion of GMP element. 

GMP increases in payment
For GMP accrued prior to 5 April 1988 there is no duty to provide inflation-linked increases in payment, however for GMP accrued from 6 April 1988, schemes must provide inflation-linked increases in line with CPI up to 3% (previously RPI prior to 2010). There is no statutory requirement to provide increases on non-GMP pension accrued prior to 6 April 1997, however some schemes chose to provide an increase on this pension based on their scheme rules. Therefore if males and females have different GMP proportions, their pension in payment will increase at a different rate. This could favour either gender (and it could change during retirement).

8. How might this affect my state benefits?

If you were contracted out for a period of service, your State pension payable will be adjusted. 

If you retired before 6 April 2016, then you will receive your basic state pension entitlement (subject to meeting qualifying criteria).  You may also be entitled to some additional earnings related pension, however for any period you were contracted out of the SERPS, the value of your GMP will be deducted from the full SERPS entitlement you would have received, had you not been contracted out.

If you retire after 6 April 2016 the single tier pension will be adjusted to reflect the period you were contracted out of the SERPS.

9. Didn’t most schemes equalise benefits in the mid-1990s?

Following the European Court of Justice ruling on 17 May 1990 (Barber vs Guardian Royal Exchange Assurance Group), occupational pension schemes were obligated to provide equal benefits to men and woman from this date onwards.

However, it was not clear whether GMP was required to be equalised as GMP was intended to replicate State benefits, which weren’t required to be equal for men and women. As a result of the uncertainty, most schemes did not equalise for the impacts of the GMP element of pension. Instead most schemes chose to only equalise any non-GMP elements of pension.

10. What was the Lloyds case about?

Prior to the judgment, the law was not clear about whether GMPs should be equalised and, if so, how this might be done in practice. The recent Lloyds Banking Group case went to the High Court to decide whether GMPs need to be equalised and, if so, the calculation method to use to adjust members' benefits. While the judgment relates to the Lloyds Banking Group schemes, it is expected to provide a legal precedent that affects other schemes as well.

The judgment was announced on 26 October 2018 and confirmed that GMP equalisation is required.  It provided the Trustees with a number of potential approaches for achieving this.

The judgment from the High Court is likely to affect many UK pension schemes with 'defined benefits'. Members could be affected if they are in one of these schemes and had built up a GMP between 17 May 1990 and 5 April 1997. This will include some 'defined contribution' schemes where there is an underpin benefit equal to the GMP.

11. What are the principles behind GMP equalisation?

A member’s statutory GMP entitlement is not affected by the Judgment on 26 October 2018, and members’ GMPs will not be equalised as a result. Instead, the result of the Judgement requires that members’ benefits must be equalised for the effects of unequal GMP. 

12. Who is affected/not affected by GMP equalisation?

The Court hearing is only likely to affect members, or beneficiaries of members, who built up a GMP between 17 May 1990 (the date of the Barber v GRE judgment) and 5 April 1997 (when GMPs ceased to accrue). Members who transferred in benefits from a previous scheme which include GMP built up over this same period will also be impacted. Other members are unlikely to be affected by the judgment.

The Court judgment could affect the pensions for both men and women, and both pensioners and non-pensioners.

13. What about previously transferred benefits?

There are still a number of unresolved matters following the judgment including the position on historic transfers out. 

14. Could any members be worse off as a result of equalisation?

The value of members’ pensions will not go down as a result of GMP equalisation. Any underpayment from previous payments made will also need to be equalised, and some members may be due a back payment.

The Lloyds judgment does not necessarily mean that members’ benefits will increase. This will depend on their individual circumstances and will require detailed calculations to determine.

The impact of GMP equalisation for individual members will depend on the method of equalisation chosen by the trustees and the individual member’s circumstances.

15. What are the different GMP equalisation methods and how do each of the different methods work?

There were various methods discussed by the High Court in order to equalise benefits.

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