Employers concerned over complexity and cost of GMP equalisation
In the second of a series of reports outlining the results of the ACA’s 2019 pension trends survey, the Association of Consulting Actuaries (ACA) has found employers are particularly concerned about the complexity and cost associated with the equalisation of GMPs, with many employers remaining undecided on how they should respond to the legal requirement to act.
Where have we got to since the judgement in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank PLC & Others  EWHC 2839 (Ch) confirmed that GMP equalisation is required?
The key developments include:
- a supplementary judgment in December 2018—Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank Plc and others  EWHC 3343 (Ch),  All ER (D) 38 (Dec)—which confirmed that an actuarial equivalence calculation could be used in order to carry out GMP equalisation by way of GMP conversion (rather than it being necessary to first use one of methods B, C1 or C2)
- the Department for Work and Pensions published guidance in April 2019 on GMP conversion. The statutory mechanism for converting GMP to non-GMP benefits has been an option for pension schemes since 2009, but it has rarely been used. The guidance helps to clarify some details although it also raises some new questions. Despite this, many schemes are expected to adopt conversion not least because it gives schemes an opportunity to reshape benefits and simplify administration
- the cross-industry Pensions Administration Standards Association (PASA) working group issued guidance on GMP equalisation in September 2019. The guidance gives pragmatic solutions to a number of questions, but notes that there are still areas which need clarification and it is merely guidance
- HMRC confirmed in its 30 October 2019 newsletter that its guidance on the tax implications of GMP equalisation will be published in December 2019
In the meantime, day-to-day decisions have had to be made in relation to certain benefit calculations such as:
- transfer requests
- trivial commutation requests
- serious ill-health commutation
- pension sharing on divorce
Some schemes have continued to pay unequalised benefits in the knowledge that they may have to revisit the payment in the future while others have considered whether an uplift needs to be applied at the calculation date and have applied an uplift accordingly.
What further developments can we expect in the coming months?
A third Lloyds judgment is expected following a further hearing due to take place in late spring 2020. The question for the court on this occasion is what action, if any, should trustees take in relation to transfer values they have paid out prior to the first Lloyds judgment. The hearing will not cover the ‘de minimis’ question—what action should be taken in relation to members for whom the cost of equalising would exceed the amount of additional benefit the member would receive? Trustees will need to make their own decisions on this point, but the court did not appear to be sympathetic to a cost-benefit analysis approach to deny members their full entitlement.
HMRC intends to publish guidance in December 2019 in respect of the pensions tax treatment of benefits which are equalised for the effects of GMP. The guidance will cover the lifetime allowance, lifetime allowance protection regimes—including enhanced, fixed, primary and individual protection—and the annual allowance. The tax issues arising in connection with GMP conversion are more complicated, and HMRC is continuing to work on these—guidance on these issues, as well as on other pension tax issues such as the payment of crystallised lump sums, is likely to be published during 2020.
The PASA working group intends to publish separate guidance notes on data issues, impacted transactions, tax issues, and reconciliation and rectification of GMPs. The guidance note published in September 2019 will also be updated as and when there are material developments.
The pensions industry had hoped that easements to the GMP conversion process would be introduced in the near future. However, the recently-published Pensions Bill does not, at this stage, include any proposed changes to the GMP conversion legislation.
A survey from ACA found that employers are particularly concerned about the complexity, cost and increased liabilities associated with implementing the equalisation of the GMPs. How do these issues present such challenges to employers? What can be done to address these concerns?
Whether GMP equalisation is achieved by way of GMP conversion or one of the other methods, there will be significant cost and complexity associated with the exercise.
GMP conversion is untested—giving rise to many uncertainties—therefore both trustees and employers are likely to need legal and actuarial advice. Conversion cannot be used to address unequal payments made to date, but it can address future payments. Once conversion has been completed, it is likely that administration of the scheme will be more efficient.
The non-conversion methods require administration systems to be developed to allow duplicate ‘ghost’ records to be maintained for each member until the benefits payable to or in respect of them are exhausted, so as to enable comparisons between the two records to be carried out on an ongoing basis.
What steps should an employer take to best achieve full GMP equalisation, while reducing the risk of the above barriers?
Although more guidance is needed before any implementation is carried out it is important to prepare as thoroughly as possible—a portion of pensioners are currently being underpaid. Employers should work with trustees throughout the GMP equalisation process. Trustees should be setting up joint working group comprising employer and trustee representatives, and their advisers to ensure GMP rectification and reconciliation exercises are completed and to identify any data gaps (and the most appropriate method of dealing with those gaps).
Trustees should urgently consider whether their rules require or permit the forfeiture of any benefit that has remained unpaid for a period of six years or more (legal advice will be required). If so, trustees should consider what steps a member needs to take (if any) to ‘stop the clock’. Many trustees have written to members to explain the judgment and what to expect going forwards.
According to the survey, many employers remain undecided on how they should respond to the legal requirement to act. What are the legal requirements for employers? What is the risk of inaction? The legal requirement to equalise for the effect of GMPs rests with the trustees but the size of the project will mean many sponsoring employers will want to be involved. Trustees who do not receive any input from the employer will have no choice but to adopt method C2, the only equalisation method which the Lloyds judgment held to be possible without employer consent. This method may be more costly than GMP conversion, and will remove the opportunity to simplify scheme benefits (which is available under GMP conversion). Employers should ensure that their voice is heard as early in the process as possible, so as to guide the focus of the equalisation project towards their preferred outcome.
Separately, employers should already have included an allowance for the costs of GMP equalisation in their annual accounts (filed by 30 September 2019). Similarly, an allowance should be included in future accounts until the anticipated GMP equalisation exercise has taken place.