Thousands of Defined Benefit (DB) schemes have to change their rules, if they haven’t already done so, to equalise guaranteed minimum pensions (GMPs) all the way back to 1990. The latest catalyst was a landmark Lloyds Banking Group case in 2018.
A GMP is the pension amount paid by pensions schemes roughly equivalent to the amount an employee would have received if they had not been contracted out of the state additional pension or SERPS.
Stewart Winter It has been quite a while since the Lloyds Bank case. Things are starting to hot up again. HMRC has published newsletters and more are expected. PASA has also provided guidance.
Simon Borhan on 17 May 1990, the European Court of Justice (ECJ) ruled in the Barber case that it is unlawful to discriminate between men and women in occupational pension schemes. Though that judgment applied from 17 May 1990, it has since been unclear whether that principle also applies to GMPs. That came to a head in the Lloyds Bank case in October 2018 in which the High Court decided that trustees are under a duty to equalise for GMPs and considered methods for doing so which were lawful in principle. The court further decided that trustees were obliged to make back payments to members, potentially right back to 17 May 1990, but that is subject to scheme rules, and that simple interest should be applied at 1% above base rate.
John Wilson Trustees are looking for clarity from service providers. They are very conscious that they have been paying incorrect payments for a year and half now to thousands of members.
Donna Dickie At the outset people were keen to understand the liability impact. We estimated that the expected uplift across our clients using C2, was a median uplift of about 0.5%
Stephanie Hawthorne: Business as usual or chaos central?
Stewart Winter Chaos central. Our job is to mitigate the chaos.
Stephanie Hawthorne: Are clients ready to equalise GMPs now?
Stewart Winter There are data and communication issues. There is a need to choose which method to use and how to implement it.
Donna Dickie Most are sitting tight, waiting for more guidance from PASA and HMRC but there is quite a lot you can do on data now, e.g. draft a data specification with respect to the minimum amount of data you need and test whether that data is available.
Stewart Winter If we are too pedantic on data the cost can be astronomical.
Simon Borhan In an ideal world, you would have correct data for all members, but this will not be the reality for many schemes . It is about being reasonable and proportionate to mitigate this, and noting the risks.
Stephanie Hawthorne: Communications have been haphazard
Donna Dickie Rectification can cause a benefit go up or down while equalisation can cause a benefit to go up so you could have a scenario where you tell members pensions are going down and six months later pensions are going back. If it is feasible and time frames permitting, aligning both could make communications easier.
John Wilson For schemes that completed GMP reconciliation, there is a fundamental decision: do you do equalisation and rectification concurrently?
Stewart Winter Half the industry doesn’t understand the nuance of GMPs. Try getting that across to the layperson.
John Wilson I am aware of schemes that have taken the first step towards equalisation by equalising transfer values so they will have had to have communication then. For schemes that have really not started to get going on GMP I have seen a mixed bag on member communications.
Stephanie Hawthorne: What is the best GMP equalisation method?
Donna Dickie Different approaches will suit scheme circumstances. The B method is expected to be the most expensive and is not expected to be widely adopted. It is really a choice for our clients between the C2 dual record approach and conversion, and D2 conversion with the majority currently preferring D2. Most of our clients prefer the conversion route as that is currently the insurance market’s preference in buy-outs and buy-ins although I hear there is a little bit of softening on that. Other benefits of conversion include that it is a one-off calculation versus the ongoing costs of dual records, plus conversion could allow for some benefit simplification, although there are a number of tax complications which also need to be considered.
Simon Borhan Conversion is more complex from a legal perspective. This is because conversion involves trustees (and potentially statutory employers) running a statutory consultation process. Substantial reshaping of benefits potentially complicates matters further and trustees should consider members’ expectations, the scope of their power to convert under statute and their rules and tax issues for members.
John Wilson Conversion is not the panacea we thought it would be as there are tax consequences. When you do conversion, people who have fixed protection can lose that protection and people who don’t use up any annual allowance because they might be paid up deferred members, might suddenly have an annual allowance pensions input in the year of conversion, and possibly in subsequent years, so pension conversion has to come with a real health warning. For now, there are work arounds.
Stewart Winter it’s going to be very messy. We need good communication which doesn’t dumb it down.
Simon Borhan There is no hard deadline when schemes need to do this. But there will come a point when it becomes increasingly difficult to say trustees are acting reasonably by not equalising.
John Wilson Trustees should be getting a little bit nervous that they have knowingly and deliberately been paying incorrect entitlements for in excess of a year and half. And they should be directing their minds on how they are going to respond. For me, the way forward with this is to move ahead on a principle of minimal interference, C2; this does not stop them moving to D2 if things change.
Simon Borhan One of the unanswered questions is where the obligation to equalise historic transfers sits - is it the transferring scheme or the receiving scheme? We expect the judgment in the latest Lloyds Bank hearing to answer this.
Stephanie Hawthorne: Will GMPs be a thing of the past in five years’ time?
Stewart Winter I doubt it. We are looking at 22 million contracted-out members. Thousands of schemes that need to equalise. one is looking at each other to see who is going first.
John Wilson We cannot go on like this forever. Trustees have a fundamental duty to pay the right benefits.
Stewart Winter In conclusion, my parting shot of advice is to be proportionate. And work collaboratively.
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This article was featured in Pensions Aspects magazine July/August edition.
Last update: 19 January 2021