Sorting out GMP equalisation – How hard can it be?
25 July 2019
First Actuarial’s Wendy Handcock goes through the GMP equalisation calculations that pensions administrators will have to carry out once clear guidance is in place
So how easy will it be to sort out Guaranteed Minimum Pension (GMP) equalisation? After all, we’re only talking about calculating benefits, something pension administrators do all the time. So it can’t be that difficult, surely?
Having looked at GMP equalisation in some detail, we think there will be a number of hurdles to overcome before schemes even get to the point when they can commence work. In this article, I discuss those hurdles and go through the work pension administrators will have to carry out to equalise GMPs.
Identifying the members affected by GMP equalisation
The first thing schemes need to do is to identify those members who have a GMP entitlement built up between 17 May 1990 and 5 April 1997, the GMP equalisation window. Some of those members may now be pensioners (and in receipt of a pension for more than 20 years). Some, either active or deferred members, may not yet be taking their benefits. Others may have transferred out, or had all their benefits settled, by way of a lump sum payment or via an annuity policy in the member’s name.
And of course, some affected members may have died, in which case we’ll have to look at the benefits paid to their survivors.
Does this mean that we don’t have to look at members who joined after 6 April 1997? Yes, providing the benefits they transferred into the scheme – or the benefits they had set up within the scheme as a pension credit member – do not include GMP.
It’s not clear what action, if any, we need to take for those members whose benefits were previously settled. Hopefully the next GMP equalisation ruling in the Lloyds Banking Group case will give us some clarity relating to transfers.
Calculating benefits for the opposite sex
Once we’ve identified all the members affected by GMP equalisation, the next step is to establish the information we need to calculate the benefits the member would have been entitled to had they been of the opposite sex. To do this we need to go back to the point the member left pensionable service, the last point before total benefits diverged for males and females.
For those pensioners who retired as active members, we will need to go back to the date of retirement. A number of questions arise here. Will this information be held on the administration system, or will we need to trawl through the calculations behind the retirement quote to get the information we need? And what do we do if the last scheme administrator didn’t pass us the retirement quote calculations? Will we work back from the current pension and strip out all pension increases to get back to what we believe would have been the starting pension?
All of this may involve us making a number of assumptions, and we cannot be 100% certain at this point that this will be good enough.
Where individuals commuted pension for cash at retirement, do we need to consider whether that decision would have been different had they been of the opposite sex? Are there any members who were restricted in the amount of cash they could take because GMP could not be commuted? Can we just ignore this? Let’s hope so.
For those who retired as deferred members, we will need to go further back from the date they retired to the date they left pensionable service, which could be over 20 years ago.
The big issue here is data. Can we replicate the current pension from the data we hold? If we can’t, then we may need to make some sweeping assumptions when it comes to calculating the benefit entitlement if the individual had been of the opposite sex.
The sorts of issues we are likely to come across at this point is whether we have the full history of part-time/full-time hours, and whether we have details of any late or early retirement factors applied at that time. This information will have been used to determine the total pension at date of leaving or retirement date. A key question is whether the administrator at that time kept that level of detail on the system.
HMRC is helpfully providing administrators with details of the GMP covering 1990-1997 for both the ‘true’ sex and the ‘opposite’ sex, calculated using year-on-year contracted-out earnings. This, together with information from retirement quotes or benefits recalculated from scratch, will then be used to recalculate the benefits at retirement for the ‘opposite’ sex, and then at each pension increase thereafter.
Having established the year-on-year dual records, we will apply the chosen GMP equalisation method to determine the equalised pension benefit, year on year, then compare those with the amounts paid. And where a top-up is required, we will determine the sum of back payments due (including any interest).
For a reminder of the different calculation methods, please see our First briefing on GMP equalisation.
The sums may not be complicated, but it’s a detailed process that is bound to take time.
When can we start equalising benefits?
We’re not in a position to start equalisation benefits just yet. There are still a number of areas where we are waiting on guidance as well as the outcome of the next Lloyds Banking Group court hearing.
The cross-industry working group has identified ’29 dark corners’ – the tricky bits where further thought is needed. The pensions industry is expecting guidance on these later this year, and we think it is sensible for schemes to at least wait until this is available and understood. Only then should they start carrying out individual member GMP equalisation calculations.
In the meantime, trustees and their administrators should be establishing their data requirements and address any gaps in the data.
Work can also start on considering which GMP equalisation method will be appropriate for their scheme. There’s a lot of talk in the pensions industry about using GMP conversion to address GMP equalisation, and that approach may appeal to some schemes. But as it can only be applied prospectively, one of the other methods will need to be chosen for determining back payments for current pensioners. And there is nothing to stop schemes from thinking about that now.
At First Actuarial, we’re aware of the huge amount of calculations that pensions administrators will have to carry out, and we are preparing for that. Once the necessary clarifications are in place and the work can finally go ahead, it will be volume of calculations, much more than complexity, that will be the big challenge with GMP equalisation. To keep costs down as much as possible, we’ll be automating as much of the calculation work as possible. Get in touch with me (see box below) if you need help on the preparation work or simply want to plan ahead.
Wendy Handcock spoke on GMP equalisation at our recent client conference with Duncan Buchanan from Hogan Lovells. A video and slides from the session are available on the First Actuarial client conference 2019 web page.