Insurance companies offering buy-ins and buyouts prefer pension schemes which adopt the D2 method of equalising guaranteed minimum pensions (GMPs), Hymans Robertson has found.
The consultancy conducted a survey to find the most and least popular methods of GMP equalisation among insurers offering bulk annuities and how that could affect the pricing they offer to schemes.
Seven of the eight insurers active in this market responded with a preference for the D2 conversion method, with six of those stating pension schemes could expect to receive the most competitive pricing from them should they choose to use this method.
Method D2 involves converting all of the member's GMP into a non-GMP benefit, and then including an uplift to provide benefits of equal value.
Method C2 proved significantly less popular with insurers, despite being favoured by the High Court in last year's judgment. This method involves assessing pensions paid to men and women each year and paying the better, while maintaining a cumulative running total and adding interest.
However, the insurers stated they were currently unable to administer this method, and schemes that chose to equalise using it could expect to receive less competitive pricing.
Hymans Robertson head of risk transfer James Mullins said: "It is vital that scheme trustees understand how insurers will view each method and factor this into their own decision making."
He added: "There is a risk that many schemes may simply default towards adopting method C2 because this was the method that the High Court said did not require additional consent. However, our analysis shows that this decision could leave pension schemes paying more to enter into a future buy-in transaction and may see them having to delay their buyout target."
Head of GMP equalisation Matt Davis added: "At the moment there are many hoops to jump through for GMP conversion. With all insurers preferring method D2 it is important that there is a practical and cost effective route for schemes to implement this method."
While the conversion method is most popular, further guidance from the Department for Work and Pensions (DWP) is required to understand how this can be done under legislation. The DWP has said it will issue this, but has not given a timeframe.
Mullins added: "Embarking on an inappropriate choice of GMP equalisation method now could cost a pension scheme millions of pounds in years to come."
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