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Survey Report

Spotlight on: GMP equalisation – insurer views

Chapter Six of the 2020 de-risking report

Pensions Corporate Consulting|Pensions Risk Solutions

By Lucy Wilson | January 20, 2020

Lucy Wilson explores insurers’ latest views on the interaction of GMP equalisation with bulk annuities.

With long-term journey planning and GMP issues identified as the top two current issues for pension scheme decision makers in a recent Wills Towers Watson survey, it’s no surprise that the interaction of bulk annuities with GMP equalisation is a serious consideration for a growing number of schemes.

Many trustees and sponsors have already taken their first steps on their GMP equalisation journey. But, with more guidance expected in the future, many pension schemes are choosing to wait before deciding on their approach to equalising their benefits. However for those schemes looking to buyout, particularly in the short term, their choice of equalisation methodology will be an important consideration. Insurers require GMP equalisation to be completed before the contract moves to buyout and they issue individual policies to members. It’s vital that the buyout insurer is on-board with the methodology and processes followed to ensure smooth sailing later down the line.

As is the case for trustees, the main determinant of whether a particular methodology can be offered is their administration constraints. In addition, the more straightforward the benefits, the easier it is for the insurer to ultimately provide these to members.

Perhaps unsurprisingly, given the removal of the complications of GMP benefits or the need for complex administration set-ups, all the insurers will offer method D2 universally, with the majority stating a strong preference for it.

Acceptable methodologies for buyout
Acceptable methodologies for buyout

As can be seen from Figure 9, other methodologies may be used, with insurers typically working to be able to administer more complicated benefits in future, although additional charges may be levied to schemes requiring this for the added complexities.

Figure 9. Equalisation methodologies supported by bulk annuity providers
Figure 9. Equalisation methodologies supported by bulk annuity providers

Source: Willis Towers Watson, September 2019

of insurers willing to transact buy-ins without the trustees having yet decided their equalisation approach

What about buy-ins?

Schemes can enter into buy-ins without having equalised GMPs. Typically, we would negotiate clauses into contracts that allow benefits to be amended prior to buyout, incorporating changes due to equalisation. However, the insurer will need to agree to any benefit changes, particularly where this could affect administration complexity. Schemes considering, or which have already transacted, buy-ins should factor insurers’ views on appropriate methodology into their GMP considerations.

Discussion is key

Insurers’ views on GMP equalisation, and their administration capabilities, are evolving. The key for schemes is to discuss the proposed approaches with insurers to future-proof their contracts. Even where an insurer’s reaction is initially that a method doesn’t work for them, insurers are typically willing to innovate for the right case.

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