The DWP has issued a consultation paper seeking views on an alternative methodology for equalising pensions for the effect of Guaranteed Minimum Pensions (GMPs) by using the GMP conversion process. The consultation covers other issues, including a proposal to reduce fixed rate GMP revaluation. We take a look at both of these changes.
Equalising GMPs and GMP conversion
Schemes that were contracted out of the Additional State Pension between 6 April 1978 and 5 April 1997 had to provide GMPs for their members. Although contracting out on a GMP basis was abolished from 6 April 1997, the GMP requirements continue to apply in respect of GMPs still held by the scheme.
GMP legislation requires GMPs to be calculated on an unequal basis due to different GMP accrual rates for men and women and different payment dates (which remain 60 for women and 65 for men despite changes to state pension age) with knock-on effects on the period over which a GMP must be revalued and when it must be increased in payment.
Following a line of cases before the European Court of Justice, the DWP reached the view that GMPs should be equalised between women and men and, in January 2012, it consulted on draft regulations and draft guidance on equalising GMPs. The majority of responses to that consultation criticised the methodology as overly complex (and arguably unnecessary) with onerous implications, so the Government did not implement those regulations and promised to have a re-think. In 2013, a Working Group was set up to establish whether GMP conversion could be used to achieve equalisation.
The method proposed in the consultation paper involves a one-off calculation to compare the benefits a man would receive with those a woman would receive, with the greater of the amounts then being converted into an ordinary scheme benefit under existing GMP conversion legislation. The method proposed by DWP in 2012 required schemes to compare, on a year by year basis, the benefits payable to a man and the benefits payable to a woman and pay the higher amount: often criticised because in reality no member would “change sex” each year to obtain the higher amount!
It has been possible to convert GMPs to scheme benefits since 6 April 2009, provided that certain conditions are met, although it has been underutilised due to practical complexities. The consultation paper proposes changes to the conversion legislation to clarify the process, including:
- confirming that conversion is possible in respect of survivors as well as earners
- imposing a member notification requirement (rather than a consultation requirement) before the conversion takes place
- imposing no restrictions on transfers made from a GMP-converted scheme.
The DWP confirms its view that GMP conversion can be used to equalise GMPs on an individual basis (ie the trustee does not have to equalise GMPs for the whole scheme membership). However, the Working Group is still considering other issues, for example, those relating to survivors’ benefits, notifying HMRC, treatment of pensions in payment and certain pensions tax issues.
The DWP intends to issue guidance to clarify some of the details of the GMP conversion process once the legislation has been amended.
The DWP stresses that it is not placing any obligation on schemes to adopt this method of equalisation - it merely confirms that in its view such a method would “meet the equalisation obligation derived from EU law”.
For those hoping that Brexit might have seen the end of GMP equalisation, the DWP’s position is that while the UK remains a full member of the European Union the Government will continue to negotiate, implement and apply EU legislation. Whether there is time to implement domestic legislation to reflect this position remains to be seen but if sufficient progress is made, the UK may adopt the same principles despite leaving the European Union.
Whilst this consultation paper is welcome, employers and trustees should appreciate that the ten-stage process mapping out the route to GMP conversion is likely to be time-consuming and costly to adopt. The paper highlights some of the difficulties involved in following the process. Employers and trustees should consider the proposals to decide whether they wish to respond to the consultation in the light of their own scheme’s situation. The consultation closes on 15 January 2017.
Employers and trustees may also wish to speak to their advisers regarding any preparatory work that could usefully be undertaken to determine whether the proposed GMP conversion process is helpful or viable for their scheme.
Fixed rate GMP revaluation
The consultation paper also proposes various changes to contracting-out legislation that remains in force. One change is to reduce the rate of fixed rate GMP revaluation from 4.75% to 4% for early leavers from 6 April 2017.
And don’t forget…
Trustees of schemes that were contracted out until the abolition of contracting out on 6 April 2016 have until 5 April 2017 to pass a resolution to amend their scheme rules to provide for fixed rate GMP revaluation to apply on termination of pensionable service (rather than on termination of contracted-out service). Failing to pass a resolution may leave the scheme having to pay the higher of two amounts of revaluation. If your scheme is affected, please contact your usual Bond Dickinson pensions adviser.