GMP equalisation – is it worth it?
5th February, 2019
In October 2018, the courts answered a question that had been lying open for the last 28 years. Must GMPs be equalised? As a trustee, I waited with baited breath (not) to hear the judgement. And the answer is yes.
So let’s start by looking at what happened. Firstly, a bunch of lawyers took a case to court asking whether GMPs should be equalised and if so, how. The case was heard in front of another lawyer (naturally). After much deliberation, the judge said GMPs need to be equalised but recognised this is not easy so he also provided details of how trustees could equalise. Given the complications with GMP, it was also helpfully suggested that trustees may wish to take advantage of the GMP conversion easement so that the equalised GMPs could be switched to ordinary excess benefits. This would mean that the administrative complications caused by GMPs would be removed.
So what has this led to? Well, all of the schemes I work with need their rules reviewed. Good work for lawyers. Processes and communications for administering member options (transfers, trivial commutations, etc.) all need to be reviewed. More good work for the lawyers.
So some lawyers took the case to court, heard by another lawyer have all done the legal profession a big favour…. Hmmm. Enough of the cynicism!
What about the member? At least their benefits will increase. This is where the actuaries come in. More advisor fees. So far, the advice from the actuaries working on my schemes has shown that pensions will increase by around one per cent. One per cent! So with average pensions on my schemes of around £5,000 p.a. my members will receive an extra £50 p.a.. Less than £5 per month. That’s the cost of a fancy coffee.
But at least trustees can take advantage of the conversion easements to remove GMPs and simplify the benefit structures which is a plus. However, if we look at what this means for members, it starts to look a bit unnecessary again. Generally speaking, one pound of excess has a higher value than one pound of GMP. Therefore, if we convert our members’ GMPs into excess, the residual pension in payment will be lower. Not much but a bit lower. So our members’ pensions are increased a bit for GMP equalisation then reduced a bit for GMP conversion. And we will need to pay our actuaries and administrators handsomely to make all these changes.
As trustees, this all means we can write to members and give them the good news that we have equalised their GMP so their pension is higher but then converted the GMP to excess which means their take-home pension has reduced back down (although it cannot go below the amount already in payment). This is a confused message. If we also tell them that the reason we have introduced the conversion is so that we it is easier for us to administer their benefits then it may sound like we are doing this just to make our lives easier rather than looking after them.
I am starting to feel cynical again. My members will be starting to feel cynical too.
I also want to look back over the last 27 years. During that time, pensions were paid to members, schemes have secured benefits from insurers and the system was working fine. It did not feel broken so why has the pensions industry (particularly the lawyers) feel the need to generate all this additional activity to provide practically no benefit to all our members up and down the country? I do not know the answer.
So in summary it seems clear to me that the proceeds of GMP equalisation will not be lining the pockets of my pension scheme members but will be lining the pockets of my advisors. Is GMP equalisation worth it? A big part of me says no.