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Article | Pensions Briefing

What makes a successful GMP equalisation project?

Pension Board and Trustee Consulting|Pensions Corporate Consulting|Pensions Risk Solutions|Pensions Technology
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By Neil Tooth and Vanessa Burke | December 3, 2020

Insights to help you plan and implement a successful GMP equalisation project.

Our Emerging Trends in DB Pensions Survey 2020 placed Guaranteed Minimum Pensions (GMP) equalisation as the number one priority for both trustee and corporate clients over the next 12 months. Neil Tooth and Vanessa Burke explore key lessons learned from early moving schemes and provide their tips on running a successful GMP equalisation project.

With the recent passing of the second anniversary of the Lloyds High Court judgment, which confirmed the need for schemes to address GMP equalisation, a growing number of schemes are now turning their attention to how they are going to get GMP equalisation done. Whilst schemes are at a variety of different stages within their GMP equalisation timeline, there is a minority of schemes that have moved first and are in the process of implementing GMP-equalised benefits and paying back payments to pensioners. But what have we learned from these early cases? We wanted to share with you some insights that we have gained from working with early movers that you can consider for your schemes to increase the chances of a successful and smooth project.

Keep or convert?

The key strategic decision for all schemes is whether to keep or convert GMPs. If schemes choose to keep GMPs, this will involve applying a “dual record keeping” approach where a year-on-year test is applied to check whether the relevant part of the pension on the basis of the member’s own sex or opposite sex should be paid. In contrast, the appeal of GMP conversion is the removal of this dual record keeping approach by converting GMP into an alternative form of benefit and removing some of the technical complexities caused by GMPs for members and administrators. Based on our survey, GMP conversion is still being viewed as a more attractive option for over half of our clients (with around a quarter still unsure).

53%
Likely to
convert
20%
Likely to maintain dual records
27%
Not sure

Although this suggests that most schemes will pursue conversion, our experience from working with early mover clients is that dual record keeping methods and GMP conversion have been used to implement GMP equalisation in broadly equal measures. Moreover, whilst conversion may sound initially appealing, Trustees and sponsors need to be comfortable with the terms of conversion, which for some is seen as a big obstacle. In addition, several schemes that started out on the conversion path have decided to pursue a dual record keeping approach once they have started to grapple with some of the complexities of GMP conversion.

This demonstrates there is not a one size fits all approach to GMP equalisation and schemes will need to make the right decision based on their circumstances, taking appropriate advice. Conversion can add complexity and one-off cost to implementation, so we expect that schemes who choose to implement GMP conversion will do this for reasons other than just GMP equalisation, for example to simplify or improve benefit structures, alongside a member option exercise or due to administrative constraints.

It is also worth noting that GMP conversion only deals with the future benefit payments. When establishing whether any back-payments are needed to address inequalities arising prior to the conversion date you still need to decide on a dual records approach and apply it to calculate the benefits due for the past.

What can we learn from early moving schemes?

  • Plan well up front. There are multiple different strands to achieve GMP equalisation which all need to come together to ensure a successful, smooth and risk-managed project. We recommend investing time and effort up front to set your strategy, develop a project plan with clear roles and responsibilities and think through the potential challenges up front with all key advisers present (lawyers, actuaries, administrators and data specialists). This will undoubtedly ensure that the project is well controlled and runs as efficiently as possible, with a positive member experience. Enlisting the support of a specialist pensions project manager is likely to be valuable, especially for those larger schemes.
  • Don’t leave communications to the end! When making GMP equalisation decisions, we need to walk in the shoes of members and think about the trust a member places in those who look after their scheme. We must also think about what level of information is right to inform but not confuse. It will be important to keep communications simple and to manage member expectations. When devising your communication strategy, you should think about your general approach to communications and consider whether to use pre-defined pathways which are templated as a solid starting point. Also, when deciding on your GMP equalisation approach, it can be helpful to think “what will members want to know?” as this can highlight potential difficulties with a chosen method.
  • Keep clear audit trails. You will be making many decisions over an extended period of time. It is important to keep clear audit trails about decisions reached and their rationale in case of any further challenge or query. Moreover, if your scheme may wish to pursue a buy-in or buyout in the future, the insurer is likely to be interested in the process that was followed.
  • Don’t underestimate the amount of legal advice required. Start thinking about the rule amendments early in the process, particularly if pursuing conversion, as drafting the amending deed can help establish technical challenges that need to be resolved. You may want to make use of worked examples to help illustrate the challenges you may run into with different design features.
  • Explore the impacts. Consider the benefit profile of members you have and how GMP equalisation might affect their benefits given your scheme’s design. This will help you identify possible easy wins, where you need to apply resources and how you might prioritise different groups in terms of the data and calculation challenges.
  • Put the right people on your working party. This includes trustees, sponsors and the team advising you. This is going to be a project where you need a good blend of deep technical thinking and an eye for the overall strategy.
  • Don’t be put off by the size of this task. Break the project down into manageable chunks, without losing sight of the bigger picture.

The importance of data

GMP equalisation is going to require schemes to create data that most do not already hold, in particular the tranches of GMP and excess benefits for the period between 17 May 1990 and 5 April 1997, together with the opposite sex equivalents. PASA published guidance on data in Summer 2020 that provides examples of the spectrum of methods for doing this. Adopting a flexible approach is really important. We expect that most schemes will vary their approach and expectations of accuracy for different groups of members rather than apply a uniform approach across the membership at an early stage. This variation will be driven by considerations such as whether the necessary data is available and the complexity of scheme benefits. It is important to distinguish between cases where you can be reasonably accurate and those where you are being more approximate and ensure suitable justification.

Understanding where gaps in data might arise will assist in planning all calculations and documenting those expectations of accuracy. Data cleansing should be targeted on areas that will make a material difference to the eventual equalisation outcome. By understanding the gaps and the materiality of any issues, you will have far more certainty about how much time and effort the subsequent calculations will take. You’ll also maximise the number of members that you can successfully process at one time and will build up an robust audit trail of the decisions that have been taken, the methodology agreed and the reasoning behind it.

When will schemes complete GMP equalisation projects?

As part of our Emerging Trends Survey, we asked our clients when they expected they would complete some of the key stages of their GMP equalisation projects. The results are shown below and demonstrate that whilst many schemes are looking to carry out a lot of the heavy lifting in 2021, the majority of schemes (over 60%) anticipate completing their equalisation journey in 2022 or later.

The timescales for completing a GMP equalisation project will vary from scheme to scheme and will depend on several factors, including scope of the membership impacted, chosen implementation method and how GMP equalisation sits alongside other Trustee projects and business as usual project.

Concluding remarks

We have written this article with two distinct audiences in mind. For the first audience, who are likely to be well advanced with their GMP equalisation planning, we expect there will be some useful tips above that you can look to build into your own GMP equalisation project. The second audience, which consists of schemes who have not yet gone into the detail of their GMP planning, may be feeling overwhelmed with the size of it.

If you are in the second group, you are certainly not alone. Although GMP equalisation can seem like a mountain to climb now, it can be managed. If you are able to implement some of the key lessons from the early moving schemes and spend the right time and effort on planning at an early stage, it is possible to see a path through GMP equalisation alongside all of your other competing priorities.

Contact

Neil Tooth
Director, Retirement

Vanessa Burke
Director, Retirement

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