The Guaranteed Minimum Pension (GMP) has provided complexity to those involved in pensions for years. We have long suspected that one day those involved in the pensions industry will need to take action to deal with the inequalities in scheme benefits caused by GMPs.
While the 2018 Lloyds judgment on GMP equalisation confirms that we have now reached the point where we need to address this particular project, how you do this still remains a decision for individual schemes.
There are still a number of outstanding issues to consider, such as; the input from HMRC on tax-related issues, whether members who transferred out benefits are still in scope, what does GMP conversion guidance look like etc.
However, there is much that schemes can do now to start to take control of the project.
So what can schemes do now?
Actually there is quite a lot, but trustees should focus on three things:
What are the proposed methods for equalising?
The High Court considered different methods – A, B, C1, C2, D1 and D2. It summarised them as follows:
The judge agreed the use of method C2 in the Lloyds judgement, but also identified method D2 as viable. Method C2 would create complexity for scheme administrators, with multiple benefit records having to be maintained concurrently (i.e. the actual benefits to be paid after any adjustments plus one for both a male and female comparator). Method D2 is a one-off exercise where all GMP benefits would be converted into non-GMP benefits, although this would require employer consent.
A group of representatives from across the industry has issued a Call for Action by trustees and employers. The group is recognised by the Pensions Regulator and is made up of professionals from the administration, legal, advisory, actuarial, data and trustee sectors. The Call sets out important points and questions that need to be considered and lists actions to take now in preparation for your equalisation project. It can be found here.
GMPs have been part of the pensions landscape since 1978 and, despite various attempts over the last decade to address equalisation issues, it is only now that we seem close to solving the final piece of the puzzle.
Read our five-minute history here.
Read what our experts have been saying about GMP equalisation:
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