Skip to main content
Article | Benefits Hot Topics

DWP guidance on GMP conversion

N/A
N/A

April 23, 2019

Last Thursday (18 April 2019), the Department for Work and Pensions issued "Guidance on the use of the Guaranteed Minimum Pensions conversion legislation" period.

Our recent survey indicated that GMP conversion is likely to be the preferred implementation route for GMP equalisation for many schemes, so this guidance is a useful step forward for many trustees on their GMP journey.

Much of the guidance is familiar, as the DWP consulted on this methodology in November 2016, however it now takes into account the Lloyds judgment on 26 October 2018. The guidance does not set out a definitive statement of how schemes must equalise, but instead describes one way of using the GMP conversion legislation that the DWP believes meets the equalisation obligation.

Fundamentally, the DWP proposes that the scheme actuary works out the actuarial value of the unequalised female and the unequalised male pensions for a member's benefits earned between 17 May 1990 and 5 April 1997, including those provided on a member’s death. The higher of these actuarial values is then converted back into pension payments for this period of service. GMP conversion applies to all of a member's GMP, so pension earned between 6 April 1978 and 16 May 1990 must be converted at the same time, although in respect of this earlier period a comparison does not need to be made with the opposite gender benefits.

Following GMP conversion, the GMP rules no longer apply to a member's benefits, which for some members may provide more flexibility when they are considering their retirement options.

GMP conversion only applies to future pension payments. This means that for pensioners and dependants, back-payments must first be calculated using another method acceptable under the Lloyds judgment. However, trustees can then take into account any back-payment when working out whether an uplift is required for future pension payments.

The GMP conversion legislation is sufficiently flexible to allow trustees to convert benefits where they consider it is necessary or desirable, subject only to not reducing a pension in payment and providing a spouse's pension of at least 50% of the member's pension for service from 6 April 1978 (men) or 6 April 1988 (women). The Cash Equivalent Transfer Value (CETV) basis may be suitable for conversion calculations, but the DWP suggests that it should be reviewed to check it is appropriate for this purpose; there is also a strong steer that trustees should consider using unisex factors for the conversion calculations.

The guidance reminds trustees that they can convert GMPs for the scheme as a whole, or only for some or all of those members affected by GMP equalisation. However, they must always obtain the consent of the relevant employer and consult with affected members. Helpfully the DWP indicates that it expects this consultation to be at a high level, explaining the proposed changes in order to resolve the GMP inequality issue and that the value of the member's benefits will be preserved. Details of the actual changes to a member's benefits will need to be provided once the conversion calculations have been completed.

Implications of GMP conversion

As GMP equalisation directly affects members' pensions, GMP conversion has implications for a wide range of pension scheme operations including pensions cost accounting, scheme funding and scheme administration.

Outstanding issues

While the guidance from the DWP provides a welcome step forward on the road to GMP equalisation and conversion, there remain a number of areas of uncertainty where further clarity will be required including:

  • Treatment of former members of a scheme, such as members who have transferred out or died.
  • How the conversion guidance should be applied to defined contribution schemes with a GMP underpin (where the DWP suggests trustees should take their own legal advice).
  • How precisely schemes should ensure that a spouse's pension will be at least 50% of the member’s pension, where at present for some schemes the spouse's benefits payable following a member's death may be restricted to a lower amount.
  • Specific tax treatments, including Annual Allowance, Lifetime Allowance and trivial commutation lump sums, where guidance from HMRC will need to be provided.

HMRC's views on how GMP conversion fits into the tax regime remains a key issue. In practice, for many scheme members these tax issues are an irrelevance, but they can be material for some members, and cause complications for administrators. Until HMRC confirms the position, this remains a major obstacle to schemes wishing to equalise either using GMP conversion or one of the other methods covered under the Lloyds judgment.

Next steps

The DWP indicates that the Government is still considering further changes to the GMP conversion legislation to clarify certain issues. Hopefully, these changes will be covered in the Pensions Bill expected in the summer but it is likely to be some time in 2020 before these are in force. Crucially HMRC will need to advise how GMP conversion should be addressed under their guidance.

There is also the possibility of a further Lloyds hearing to address unanswered questions, which may address the treatment of historic transfers.

The DWP indicates that it will update its guidance from time to time to reflect any changes in legislation or material developments in case law.

Related content tags, list of links Article Benefits Hot Topics United Kingdom
Contact Us