A recent consultation outlines a 10-step approach to GMP equalisation. However, there is a need for more clarity finds Helen Morrissey.
The government has proposed a 10-step process schemes can use when equalising guaranteed minimum pensions (GMPs).
In a consultation published on 28 October the government said it had been working with a group of leading industry practitioners to find an appropriate methodology.
Draft regulations had initially been published in January 2012 for consultation. The method proposed by the government had required schemes to compare the position of a male against a female on a year-on-year basis and pay the better of the two. Draft guidance had also been published after the industry asked for guidance on a standard method for equalisation.
However, the draft regulations were subsequently withdrawn following industry concern that the proposed methodology would be too onerous to implement.
New proposed method
The method now being proposed involves a one-off calculation and actual comparison of the benefits a man and woman would have, with the greater of the two converted into an ordinary scheme benefit under sections 24A to 24H of the Pension Schemes Act 1993.
The method compares the value of the future expected cash flows for the member in the period that needs to be adjusted for GMP inequalities (i.e. during the period from 17 May 1990 to 5 April 1997) with that for the opposite sex comparator, allowing for contingent benefits.
If the opposite sex comparator has the greater discounted value of expected cash flow, then that greater value is delivered. Schemes will have to consider whether it is appropriate to use the cash equivalent transfer value method, or whether another method would be more appropriate.
In order to avoid having to comply with the unequal requirements of the GMP legislation, the GMP is also converted into a benefit that is not subject to the requirements of the GMP legislation. Because of the benefits that simplification provides, it is likely all the GMP will be converted; not just that accrued between 1990 and 1997.
The pension that accrued alongside the GMP that is to be converted may also be put through the conversion process.
The consultation says government is not obliging schemes to use this method and states it should not be treated as a definitive statement of how equalisation should be carried out. Trustees are to use their discretion as to what method is best.
Barnett Waddingham head of pensions research Tyron Potts welcomed the consultation: "What has been put forward here is a lot more sensible than the approach adopted in 2012, which was horrendously complex," he says. "The approach put forward back then would have entailed schemes having to check every year which is so impractical. A more straightforward approach is to be welcomed and it is also pleasing to see the Department for Work and Pensions work with the industry on this issue."
However, Potts also says the consultation leaves several questions unanswered, most notably the position to provide equal pensions following the UK's decision to leave the European Union (EU).
No definitive answer was given within the document which said: "The government's position is that, the UK remains a full member of the EU and all the rights and obligations of EU membership remain in force. During this period the government will continue to negotiate, implement and apply EU legislation."
"This position has not been closed off - it just says that we have to comply now as we are members of the EU, but this won't always be the case," says Potts. "It would have been helpful to have some idea as to whether this will apply post Brexit."
However, Hymans Robertson head of corporate consulting Jon Hatchett expressed concerns about the time and costs associated with the proposed approach: "Given that legislation makes GMP inherently unequal between the sexes, this is pretty tricky," he says. "Compounding that, schemes will need to look back to member data from 25 years ago, when microfiche was all the rage. The cost to industry of pressing ahead with this will be disproportionate to the potential gains made by scheme members. The real winners will be the advisory community and administrators, who will need to help schemes navigate the complexity that equalisation brings."
He continues: "Second, one of the core building blocks that will enable equalisation to take place is GMP reconciliation. The government is already creaking under the weight of queries. There is currently an eight month backlog to process GMP data at HMRC, and it's getting worse not better. This is already going to increase administration costs for trustees. Arguably the priority for government should be resolving this.
He also expressed concern that the approach could see tens of billions added to the liabilities of UK defined benefit schemes at a time when deficits have reached record highs.
While it is helpful to have a 10-step process outlined in the consultation, Potts suggested schemes should not rush to action until the situation around the EU is clarified: "The immediate thing is to do nothing as this is just at the consultation stage," he says. "Until we get an indication as to how things will work out with Brexit we just don't know and this could take several years. There will be those schemes who will need to equalise - for instance those being wound up - and this method could work for these schemes but the rest should just wait and see."
Responses to the consultation must be received by 15 January 2017. Responses can be sent by email via [email protected] or by post to Department for Work and Pensions, Contracting-out policy team, first floor, Caxton House, Tothill Street, London, SW1H 9NA.
The Pension Schemes Bill has completed its third reading, crossing its latest hurdle in the House of Commons.
An amendment to the Pensions Schemes Bill which would have seen people given a pre-booked Pension Wise appointment ahead of accessing their retirement savings has been defeated.
A proposal to ensure savers receive a Pension Wise appointment prior to accessing their retirement pot has received cross-party support in parliament, while Labour seeks net-zero pensions by 2050.
Pension scams are not just about the money lost, but the lives devastated, says Nicola Parish, so the industry must unite to defeat this scourge.
Trustees must know the signs of sponsor distress and be prepared to act quickly as the “first line of defence” for savers, The Pensions Regulator (TPR) has warned.