GMP and the need to equalise
18th December, 2019
For many, GMPs seem like a nightmare from the past. They had detailed rules for calculating the amounts and added complexity to UK pensions with different retirement ages and ways of revaluing in deferment and payment compared to main scheme benefits. However, they ceased to build up in April 1997, over 20 years ago, so how can they still be causing problems?
Well as we all know, the key thing about GMPs is the different calculation between men and women. Despite the 1990 ECJ Barber judgement on the equalisation of pension benefits, we all put our heads in the sand. We heard cries of ‘they replicate state benefits which Barber doesn’t apply to’ and ‘how can we equalise them – if we choose one method it might prove to be wrong at a later date’. As a result, unless you were winding up a scheme, most trustees didn’t do anything about equalising GMPs.
Assembling the jigsaw
But we can put it off no longer. The Lloyds case confirmed what the acceptable methods are to equalise GMPs, and the GMP Equalisation Working Group has published methodology Guidance to help us further with working examples. However, there are still a number of unanswered questions not least of which is the tax treatment of any increases in pensions, back-payments and whether payments will impact annual and lifetime allowances. We have been promised more on this in December 2019.
Guy Opperman, the pensions minister, has told us to get on with it, as more than a year has passed from the Lloyds judgement. And I have some sympathy for this. I am not sure we have enough of the pieces of the jigsaw to fully sort out GMPS, but we can make a start.
Firstly, we need to look at the data. We need to be able to recreate members’ benefits stretching back to the point at which they left the scheme. If your administration has stayed with the same provider for the past 30 years you might be lucky enough to have all the data. However, if you have moved administrators then there is a chance that you will not be able to recreate the benefits. Until we start looking at it we will not know. Of course, this might uncover other issues such as inconsistent practices or errors in member calculations. You don’t know what you might find if you start looking under rocks.
There is one fly in the ointment – HMRC still hasn’t processed all the GMP queries yet and the 31 October 2018 deadline has now been replaced with a 2019 deadline. So schemes are still waiting to agree who has GMPs and the amounts. I would hope that most schemes are there and that they are not being held up further.
Once we have the data there are a number of questions that need to be sorted on a scheme by scheme basis.
What are you waiting for?
The bottom line is that we are paying some members the wrong benefits. Whilst I have heard the argument that we have waited 20 years already why not wait a little longer, we now know what to do. I feel the frustration that members are likely to see a marginal impact to their benefits and that this exercise is a win to actuaries, lawyers and administrators, but we just have to get on with it.
Whilst we wait for the final questions to be answered start getting your data ready. Look to see how many members may be impacted. It’s quite easy to see whether it will be men or women who will tend to be better off so that you can work out what the most appropriate approach will be. Also, don’t forget to think about the future – if you are never going to buy-out then a year-on-year approach always pays the right benefit and avoids needing to make assumptions. But if you expect to buy-out you need to appreciate that a year-on-year approach will make your scheme less attractive to the insurance market and will increase the cost of buy-out.
So what are you waiting for?