GMP equalisation and your pension scheme – What trustees need to know and how they can prepare

Part one of a series of GMP updates. The latest developments and guidance on GMP equalisation, from Robert Wakefield, Head of Pensions Administration at First Actuarial.

The whole issue of GMP equalisation came to a head in the recent Lloyds Banking Group ruling, in a case brought by three women. They claimed that the lower rate of GMP increases for female pension scheme members amounted to sex discrimination. On 26 October 2018, Justice Morgan ruled that the trustees’ duty to pay equal benefits applies to GMPs, as it already does to retirement age, for example. All schemes with GMP rights will have to put equalisation into effect.

With GMP equalisation well and truly on the front burner, however, the issue remains in turmoil. A recent meeting I attended – with representatives from The Pensions Regulator, the Department of Work and Pensions and other Third-Party Pension Administrators (TPAs) – confirmed that there is still no clear way forward.

Although the Lloyds Banking Group ruling has given us clarity on ‘what’ to do – we have to equalise GMPs – the ‘how’ to calculate it remains uncertain.

Why is GMP equalisation such a problem?

There are in fact several established ways of calculating GMP equalisation. We outline these in a table in our recent First briefing on GMP equalisation.

So what’s the problem?

Well unfortunately, while the Lloyds Banking Group ruling considered each of those methods, it failed to provide direction on which to use, although two of them look more likely than others. After years of waiting for a firm steer, we still have no certainty on the correct way to equalise GMPs.

There is no quick and easy solution, no reliable one anyway. We plan to produce a GMP equalisation calculator once firm guidance is in place, but right now we run the risk of wasting everyone’s time and money by basing it on the wrong method. There’s a great deal of detailed work involved in GMP equalisation at individual member level – I plan to cover this in detail in a future GMP equalisation update – and nobody can afford to go through it more often than they have to.

In fact, the effort and costs involved will all too often exceed the value of any additional benefit calculated, whatever the Daily Express says about the promise of a pensions windfall. Many scheme members might receive an arrears payment of something like £35 and a rise in pension of £7 p.a., all subject to tax.

It’s precisely for this reason that the pensions industry has been reluctant to equalise GMPs until they have no option but to do so. Unfortunately, nobody has seen fit to set a minimum change value.

Preparing for GMP equalisation

Pension scheme administrators had until the end of December 2018 to issue any discrepancies between their own GMP liability records and those of HMRC. Here at First Actuarial we managed to get almost all our records cleared, and we did this by making sure there was a full history in place of all earnings and contributions contracted out of the State Earnings Related Pension Scheme (SERPS) between 1978 and 1997.

GMP equalisations will be based on this contracted-out data, so any scheme that has failed to check it before now needs to take care of it as soon as possible. Once you’ve done that, you’ll be in a good position to embark on the necessary calculations as soon as a ruling is made on the correct method.

Another thing to consider now rather than later is the very real scenario where a scheme member of a Defined Benefit scheme with GMPs asks for a transfer value. Up to now, transfer value calculations have not equalised the GMP elements.

As the situation stands, either the member will forgo any future benefits related to GMP equalisation or the scheme will have to pay an additional amount once the situation becomes clearer. The latter option involves making partial transfers from the scheme, which isn’t always possible, and the receiving scheme has to be willing to receive an additional payment. This should give you some idea of how cumbersome GMP equalisation will be.

We know from discussions with trustee boards how worried they are about the prospect of equalising GMPs. But once we have a way forward you’ll be able to hit the ground running if you follow these three steps today:

  1. Check that your contracted-out membership data is accurate and up to date.
  2. Review your scheme transfer processes and make sure your members are not disadvantaged
  3. Make sure you have a good quality pension administrator in place.

At First Actuarial, we’re aware of the huge amount of calculations that pensions administrators will have to carry out once clearer guidance is received, and we are preparing for that. We’ll be automating as much of the calculation work as possible, to keep costs down for our clients. Trustees should make sure they have good quality pension administration in place, in advance of a ruling. Get in touch if you need help on the preparation work or simply want to plan ahead.

Any questions or comments about this article?

Get in touch with the author, Derek Benstead.

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