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Seeking a proportionate approach to the latest GMP equalisation judgment

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By Richard Akroyd and Simon Pariser | December 3, 2020

How might the pensions industry deal with the latest Lloyds High Court judgment and what are the immediate next steps that trustees should be taking?

We now know that many former members of pension schemes who have transferred their benefits must be compensated for any sex inequality in their original transfer payment arising from GMPs accrued after 17 May 1990. Whilst some are viewing the final Lloyds High Court ruling as the final piece in the puzzle for equalisation, the latest ruling needs some head scratching if we are to get to grips with this in a proportionate and practical way. In this note Richard Akroyd and Simon Pariser analyse how the pensions industry might tackle this latest chapter in the GMP journey, a voyage on which many schemes embarked on many years ago.

The “who” and the “what” (planning around your data)

The ruling clarified that it is a member’s responsibility to claim a payment, however trustees need to be proactive in considering their response. Moreover, while most members may be unaware of their claim currently, we speculate that it may be only a matter of time before enquiries start to come into the scheme.

Make no mistake, the challenge for many schemes could in theory be huge. To do this exercise precisely would require member details for all individual transfers over the last 30 years, to identify from this those in scope, and then to calculate whether an uplift applies; if this is the case, you need to find the member (who may have moved), and make contact with the original scheme (which may no longer exist or be unwilling to accept a top-up payment).

Trustees may not even have a record of all members who have transferred out, for example if there has been a change in administrator, and what is available may be incomplete, inconsistent or impossible to access.

However, while trustees need to be proactive in addressing this issue, there may be some latitude in how they then proceed. A proportionate response may be to take a triage approach - as an example, be proactive where full data is available (which should be the case for more recent transfers), and try to resolve the position; in contrast, await member queries where the trustee believes they hold inadequate information, and build a process to try to address queries that may come in. For larger schemes, a phased project may be appropriate, for example starting with more recent transfers.

As a first stage, trustees should identify with their actuaries what information is needed and then establish what data is available. As was the case in the original ruling, this leads to another data “mining” exercise, but careful consideration should be given to its scope to ensure proportionality – a prime purpose would be to ensure that a calculation approach can be chosen that fits with the availability of data. It may also be possible to use this to identify, in advance, groups of members who will not be affected, and any members who fall outside the scope of the judgment.

The “how” (calculating the uplift)

We know that top ups should be based on the original transfer value calculation method and assumptions with interest (of 1% a year above bank base rate). But this could be a challenge, particularly when the original calculations were carried out some time ago:

  • In many cases older calculation routines may have been forgotten with the passage of time; changes in methods and improvements in technology mean that it may not be possible to reproduce an original calculation.
  • The assumptions adopted 30, 20 or even 10 years ago are likely to be different from those used today – and current assumptions may give quite different uplifts than would have been due to members at the time of their transfer (for example in the 1990s, price inflation might have be expected to average 4% pa or higher over the most recent 30 years, whereas actual inflation has been around 2.5% pa.

We suggest a proportionate approach where sufficient data is available might be to use a current equalised transfer value calculation routine, and “typical” or “representative” transfer bases for various periods over the last 30 years (so, as an example, the assumptions used for the Minimum Funding Requirement (MFR) might be suitable for calculations in the late ‘90s and early ‘00s, which were used by many schemes at that time). Some software, such as our own Pension Valuer Transfer Module, is able to carry out bulk runs for all members where data is available which may help to streamline the calculation process.

A more approximate approach may be necessary where data is incomplete or missing. In the extreme, this might mean calculating a top-up payment by estimating typical GMP amounts and approximate factors based a scheme’s design, the age of the member and when they transferred.

The “where” (making payment)

The judgment suggests transfers should be made to the original receiving scheme but recognises other methods of compensation are possible. In some cases, this may be extremely difficult or impossible (and establishing the position adds further cost to the process). Putting aside transfers to other DB schemes, we expect some trustees will wish to approach members directly and give them the choice of whether they receive the money directly or to choose the pension scheme they want it paid to. If possible, this pragmatic approach is likely to be easier to implement, and it may find favour with members.

The “when”

For ongoing schemes this is likely to be added to the seemingly ever-increasing to-do list. With most schemes currently in the process of working through the implications of the original Lloyds judgment for their current membership, it may be some years before they have the bandwidth to cope with these additional former members.

Some processes may need to be set up soon however – for example a holding communication to members (utilising a scheme’s publicly available website) and an outline process to deal with individual queries as efficiently as possible.

Of course, schemes approaching buyout will need to react at a quicker pace and unfortunately this may hold up winding up schemes unless proportionate and practical solutions can be implemented. We are already working with buyout insurers and clients in these circumstances to try to identify a practical way through this added obstacle.

Estimating the cost

Trustees and sponsors are going to need to get to grips with the potential liability impact of this latest judgment. Usually this should be a lot less than the liabilities arising from GMP equalisation for current scheme members, but it could still be substantial. Scheme accounts could well help here as these hold the amount of transfer payments over each year, giving a baseline for estimating the potential impact. However, as we have all come to realise with GMP equalisation, the devil is well and truly in the detail of the calculations and it is highly likely that estimates now are likely to be finger-in-air at best. Even with an efficient, proportionate process the cost of working out, tracing and paying top-up transfers may often exceed the top-up payment itself.

Conclusion

We think that the judgment will be viewed by many as another mountain to climb (albeit more of a hillock right now compared with the rest of the GMP journey). As an industry we need to seek a proportionate and practical approach to this, treating it as a call to action to right a long standing wrong.

Contact

Richard Akroyd
Senior Director, Retirement

Simon Pariser
Director, Retirement

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