The Department for Work and Pensions (DWP) has issued a consultation on indexation and equalisation of guaranteed minimum pensions (GMP) in public service pension schemes.
The consultation issued yesterday puts forward three potential approaches to the issue though the document says government is willing to listen to other potential solutions.
The consultation aims to answer two issues:
- How best to avoid the introduction of unequal payments to men and women in the public service schemes that will result from the abolition of the additional state pension (AP). There are legal requirements to pay men and women equal pensions in respect of pensionable service after 16 May 1990, and the old arrangements were designed to deliver equalisation by way of increases to AP.
- Whether, following the introduction of the new state pension, the public service pension schemes should pay full indexation on GMP earned while a member of a public service pension scheme, for someone who reaches state pension age after 5 December 2018.
The consultation states government would like to address both issues within a single policy solution.
A key consideration is whether it is in the public interest to use public funds to provide indexation on GMPs earned during membership of a public service pension scheme for all members transitioning to the new state pension.
Providing indexation to all members would cost the public purse an estimated £5bn over the next 40 years.
If government were to pay scheme GMP indexation only to those who overall would receive a lower income across scheme and state pension than expected before the transition to the new state pension then the cost would be up to 70% lower.
The potential solutions put forward include examining on a case by case basis, full indexation and conversion.
The case by case method compares total income received by the pensioner from public and state pension provision under the old and new system. Where a member has lost out financially, they would be compensated up to the value of the loss of indexation only.
To equalise the benefit this method would repeat the same calculation for an equivalent, theoretical member of the opposite sex. The scheme would then pay the higher of the male or female benefit to the affected individual.
The Government Actuary's Department estimates this approach would increase liabilities for the public service pension schemes by £1.5bn. However, the consultation adds this approach would be administratively complex, would continue for decades and would require significant investment in administration systems.
The second approach - full indexation for those attaining state pension age after 5 December 2018 is a continuation of the current policy announced on 1 March 2016. This requires the public service to directly meet the cost of indexing the GMP.
This approach prevents inequalities being introduced between men and women by the abolition of the AP and ensures no individual is worse off. While this approach would be less complex to administer it would also increase liabilities by an estimated £5bn.
The final option, conversion, converts the GMP into a scheme benefit, equating £1 of GMP to £1 of scheme benefit. This method has a similar outcome to full indexation, but public service schemes would no longer need to abide by existing GMP legislation for these members.
It has a similar cost to full indexation and is likely to involve some administrative complexity to complete the conversion but should be significantly simpler in the longer term for schemes.
Commenting on the consultation Willis Towers Watson senior consultant Sally Minchella said:
"Very few schemes have so far attempted to equalise for the effects of GMPs, except where they are looking to settle their benefits with an insurance company. Our experience of these cases, based on a similar methodology, has typically resulted in increases to a scheme's liabilities of around 1-3%. We've found that men are more likely to benefit, though women can do too. Some schemes will already have made a reserve for GMP equalisation, but most schemes have not. Even if typical costs are towards the lower end of this range the impact across all UK defined benefit liabilities would result in a staggering additional liability of over £20bn. This would be particularly unwelcome in the current environment, where many schemes have seen the value of their liabilities increase recently due to low gilt yields and increasing inflation expectations.
"In terms of timing, while there appears to be nothing stopping a scheme moving forward with its own method, the consultation does not indicate when the existing GMP conversion legislation will be amended to allow schemes to follow the approach proposed by the Government. In the meantime, scheme trustees and sponsors will need to consider how this potentially affects the current operation of their scheme, for example whether to include a reserve for GMP equalisation in their funding liabilities, and how this might fit into any existing exercise to reconcile GMPs with HMRC's records.
This consultation will run for 12 weeks and will close on 20 February 2017. Responses should be sent by email to [email protected] with the subject heading ‘Consultation on indexation and equalisation of GMP in public service pension schemes'.
Alternatively, please send responses by post to:
Consultation on indexation and equalisation of GMP in public service pension schemes,
Workforce, Pay and Pensions Team,
1 Horse Guards Road,
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