The Government, with the assistance of an industry working group, has issued long-awaited statutory guidance on GMP conversion. This is an important issue for many schemes reviewing the practicalities of implementing last year’s High Court judgment on equalising for the effect of GMPs (see our LawNow here).
The picture so far
Guaranteed minimum pensions (GMPs) are the minimum pension which a formerly contracted-out final salary scheme must provide 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. However, in the Lloyds Banking Group case last October, the High Court ruled that for scheme members who accrued GMPs from 17 May 1990 to 5 April 1997, European law requires the removal of any equality arising from the GMP rules.
The GMP conversion legislation, which has been in force since 2009, allows schemes to convert the GMP into a non-GMP benefit, so that affected members’ benefits are no longer subject to the additional, and complex, rules that apply to many aspects of GMPs.
In 2016 the Government announced a proposed methodology for equalising and converting GMP benefits. In broad terms, the proposed conversion method involved 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. This would avoid the need for the detailed calculations that otherwise arise from having to provide equal benefits (as the value of male and female GMP for members with the same pensionable salary and service record is likely to differ, and the nature of the difference will change over time).
What does the guidance say?
The guidance summarises the Lloyds case and the GMP conversion legislation, before setting out a 10-stage process for conversion (based on DWP’s 2016 approach), with commentary on what trustees should consider at each step. There is helpful confirmation that trustees do not have to convert all members’ benefits at the same time (for example, trustees could choose to convert benefits for members only once they leave pensionable service).
Other areas covered include the requirements to consult members and to obtain the employer’s agreement; which existing benefits can be reshaped (these are not limited to only the member’s GMP benefit); and the mechanics of amendment. The guidance offers additional detail on the actuary’s role and the assumptions to be used for conversion, noting that the scheme’s cash equivalent transfer value (CETV) basis will often be an acceptable starting point.
The guidance does leave several issues open. These include how to deal with past deaths and transfers out; the treatment of GMP underpins in DC schemes; resolving shortcomings in member data; and whether trustees can use sex-based actuarial factors.
Equalisation: the need for a comparator
The guidance restates DWP’s long-held view that, as a matter of European law, the requirement to remove unfavourable treatment arising from GMP rules does not require an opposite sex comparator. The Government intends to amend the Equality Act to put the point beyond doubt (the judge in the Lloyds case did not have to decide the issue, as the parties agreed to proceed on the basis that no comparator was required).
Future developments in GMP equalisation
Pieces of the fiendish GMP jigsaw puzzle are falling into place, but a number of uncertainties remain. We understand that a further hearing in the Lloyds case is still anticipated, which may deal with discrete points such as the treatment of past transfers-out. We also expect more guidance on equalisation and conversion issues from a new industry-wide working group which has been established for this purpose.
In the meantime the Government continues to consider making amendments to the GMP conversion legislation (covering subjects such as the tax treatment of converted benefits), and the guidance confirms that DWP and HMRC are discussing a number of wider pensions tax issues, including the risk that conversion or equalisation might inadvertently breach members’ existing lifetime allowance protections.
Until we have the full picture, trustees and employers who wish to take advantage of conversion should take advice on the developing situation and consider their project timetables carefully.