A view from a trustee with GMP-E fatigue
19th October, 2020
As a trustee working across multiple schemes, I must sit through many discussions with fellow trustees and our advisers regarding the method we should use to equalise Guaranteed Minimum Pensions (GMPs). The cycle we go through is similar, whoever is presenting, as we always cover what the courts have told us, why we need to equalise and the methods we can use. In summary, I take away the key points that method C2 will mean that trustees discharge their duties fully whereas method D2 can be complicated with uncertain risks but is somehow “better”.
It is at the point where yet another set of advisers quickly gloss over C2, and then deep-dive into D2, that you start to wonder why all the advisers seem to be pushing trustees so hard down the D2 route. Often, they are proposing all sorts of additional and elaborate member options exercises that could be carried out alongside the GMP equalisation exercise or as a minimum, the D2 basis lays the foundation for such exercises in future.
Whilst the advisers are talking about inequality, pension increases, cross-over points, tax implications and industry guidance, I can see the glazed-over eyes of my fellow trustees sitting very still in the camera frame on my screen. At this point I start to wonder who is getting the most out of GMP equalisation. It is not the members – that’s for sure.
Here we see a distinct difference in advisers in the market at the moment, which I fear lay trustees will not be able to identify without some help. Some advisers seem to be focusing on selling D2-based projects for many hundreds of thousands of pounds. Further, under D2 all sorts of third parties become heavily involved – actuaries on the company side and the trustee side, lawyers, administrators etc. A feeding frenzy. Worse still, it seems to me that D2 creates more problems than it solves (tax, for starters), but that’s OK too – our advisers can sort those problems out as well, for an additional charge of course.
One finance director I spoke to summed it up nicely: GMP stands for Generate Maximum Profit. This feels quite frustrating particularly in a Covid impacted economy, with the covenant strength weakened for many employers, cash very tight and company spending elsewhere cut back.
On the other hand we have advisers that advise; explaining to trustees what their duties are and the easiest way to meet them, presenting the simplest, cleanest and least costly solution to trustees, even taking into account the extra administration and being cognisant of the employer’s position. Strangely, my current experience is that this is where I am finding C2 typically prevails as the appropriate basis for GMP equalisation.
These observations I have on GMP equalisation greatly worry me. My concern is that advisers are trusted by many trustees to help them do the right thing. Getting a D2 project over the line is likely to be easy for the sales advisers, in yet another example of information asymmetry. But, when the dust settles and the industry looks back over how it has behaved with regard to GMP equalisation, my fear is that not enough of us will be holding our heads up with pride and we may have caused even further mistrust in our industry, during a very difficult period where we have the opportunity to do quite the opposite.