Since the High Court ruled in the Lloyds Bank case in October last year that pension benefits need to be equalised between men and women for the effect of guaranteed minimum pensions (GMPs), most pension scheme trustees have been awaiting guidance from the Department for Work and Pensions (DWP) on how to go about this.
The publication of DWP's guidance on 18 April 2019 is therefore an important development. However, on its own, it does not give pension schemes all the information they need in order to make substantial progress on this issue.
The DWP's guidance contains the following:
- an overview of why GMP equalisation is a problem (for more detail on this, see GMP equalisation - what is the problem with equalisation and GMP equalisation - what now for trustees and employers);
- a possible method to equalise GMPs, by using the GMP conversion legislation; and
- some practical points and an acknowledgement that more work is still to be done by DWP and HM Revenue and Customs(HMRC).
What is the DWP's method?
The proposed method is broadly the same as that which the DWP put out to consultation in November 2016, although the description of it has been updated to take account of the Lloyds case.
In broad terms, it involves reshaping scheme benefits so that they no longer contain GMPs. For each member, an actuary can put a capital value on his or her pension. If that capital value would have been higher if the member had been of the opposite sex during the period to which GMP equalisation is relevant (17 May 1990 to 5 April 1997), then that higher value is used.
That capital value is then converted back into a pension, but of a different design which does not include a GMP.
More detail on the DWP's method is available in the first part of this Insight - DWP publishes guidance on GMP conversion: what does this mean for trustees and employers.
How does the DWP's method compare with the default method under Lloyds?
The judge in Lloyds set out a default method for equalising GMPs, which he called "Method C2". For those who are familiar with Lloyds jargon, the DWP method is equivalent to Method D2. Unlike Method C2, it can only be adopted with employer agreement.
Method C2 involves adjusting the pension continually throughout the time when it is in payment, to ensure that the amount received by the member is no less than they would have received if they had been of the opposite sex during the period from 17 May 1990 to 5 April 1997. The DWP method, with its use of conversion, avoids that complexity, because it is a one-off adjustment to benefits. However it achieves that simplicity at the cost of doing greater violence to the original benefit design that members were promised.
Although it will not be the right solution for everyone, we expect the DWP's method to be popular with many schemes and employers, because it avoids the complexities and costs of operating Method C2. The nature of the reshaping of the benefit under the DWP's method is therefore an important decision for trustees, on which legal advice will be required. Trustees will need assurance that whatever reshaping they adopt is consistent with their legal duties and safe from member challenge.
GMP conversion also creates possible opportunities to reshape benefits in a manner which facilitates the scheme's objectives more generally - again, schemes will need legal and actuarial advice on this.
Should schemes now take action to equalise GMPs?
Schemes which have a pressing reason to equalise GMPs now (for example, because they are in the process of securing benefits with an insurer) should take actuarial and legal advice on whether the DWP method is suitable and how to go about implementing it.
For schemes that do not have a pressing reason, however, it would make sense to await further developments, for the following reasons.
- Adopting the DWP method may create tax issues for members. The guidance acknowledges this, and says that HMRC is considering its position on these. In the absence of a specific reason to proceed sooner, it makes sense to await comments from HMRC.
- The DWP previously consulted on changes to the GMP conversion legislation to make it simpler to use. The new guidance confirms that these changes are still being considered, but gives no detail on when they may actually be implemented. Again, if there is no urgency to proceed, it makes sense to wait for those simplifications.
What should trustees be doing now?
Even if it is too soon for most schemes to begin converting GMPs, it does not follow that there is nothing that should be done now. We suggest the following actions which will be appropriate for most schemes.
- First and most importantly, ensure you are speaking to your actuarial and legal advisers to agree a project plan for GMP equalisation, and have addressed the immediate issues (such as how to deal with transfer value requests).
- Ensure that scheme data is ready for GMP equalisation (including completing any outstanding GMP reconciliation work).
- Open a dialogue with the sponsoring employer - GMP conversion cannot be implemented without employer agreement, and the employer's views are a relevant consideration for trustees anyway.
- Arrange any trustee training so that trustees are properly equipped to make decisions e.g. on whether to adopt GMP conversion in preference to Method C2, how to reshape the benefits, and how to deal with arrears due to current pensioners. Although trustees may not need to make those decisions yet, they need to understand the issues in order to be in a position to make good decisions at the appropriate time.