The Government is finally consulting on long-trailed proposals on equalising for the effect of guaranteed minimum pensions (GMPs) in private sector occupational pension schemes, and on GMP conversion methodology.

Equalising for the effect of GMPs

GMPs represent the minimum pension which a formerly contracted-out final salary scheme must provide to a member in respect of benefits earned between April 1978 and April 1997, and are payable to men from age 65 and to women from age 60. Back in 2010 the Government reiterated its view that where a member had accrued GMP entitlement after May 1990, European law required that any inequality in scheme rules resulting from the different payment ages under GMP legislation must be removed, whether or not a comparator existed.

In 2012 the Government went on to issue sample methodology for equalising for the effect of GMPs, which suggested that schemes compare the GMP earned by men after May 1990 with that for women on a year by year basis and pay the higher of the two. This was criticised as complex and expensive. The methodology was withdrawn and the Government instead committed to an industry working group on the topic, and to reviewing the existing (but inflexible and barely used) legislation that allows the conversion of GMPs into non-GMP benefits.

A way forward for equalisation?

The DWP is now suggesting a revised methodology for GMP equalisation. In broad terms, the proposed method involves a one-off calculation and actuarial comparison of the benefits a man and woman with the same pensionable service details would have, with the greater of the two then converted into an ordinary scheme benefit using the GMP conversion provisions. The Government makes very clear that schemes are not bound to follow this method, nor is it offering advice to them on how to equalise: it is merely describing one method of equalising for the effect of GMPs in a way which it considers reflects EU law.

Other points on GMP conversion

The Government seeks views on suggested changes to the current GMP conversion legislation. These would put beyond doubt that it could be used for survivors, that members should be notified (but not consulted) in advance, and that there would be no restrictions, post-conversion, on onward transfer. Helpfully, DWP also confirms its view that the legislation can be applied on an individual basis and so does not compel schemes to convert all members’ GMPs at the same time.

A number of other issues on conversion are still being worked through, including the requirement to provide a survivor benefit, definitions of pre and post conversion benefits, the treatment of pensions in payment, arising pensions tax issues, and notifying HMRC. The timing of the process is uncertain: the Government intends to issue guidance once the primary legislation has been amended, but this cannot happen “until a legislative vehicle becomes available.”

Other amendments following abolition of contracting-out

For good measure this consultation also includes various, mainly tidying-up amendments to the legislation governing formerly contracted-out rights. The proposed changes include tweaking the rules on amending formerly contracted out schemes, clarifying how GMP revaluation works following a scheme transfer, and reducing fixed rate revaluation to 4% for early leavers after 6 April 2017.

However, the problem of the current law preventing bulk transfers to schemes that have never been contracted out has been parked until next year. The consultation is silent, too, on existing difficulties with the calculation of trivial commutation lump sums based on GMPs.

What happens now?

Employers and trustees cannot do much before the promised changes to conversion legislation are implemented, and in many cases will have GMP reconciliation exercises to complete before they could approach the task anyway. However the consultation shows that whilst the Government is committed to ensuring that schemes equalise for the effect of GMPs, it has been willing to take on board industry feedback on ways this might be achieved.

The consultation closes on 15 January 2017. It can be found here:

https://www.gov.uk/government/consultations/occupational-pensions-draft-regulations-legislative-review-and-guaranteed-minimum-pensions-equalisation-methodology