The Department for Work and Pensions (DWP) has released its first batch of guidance setting out how the guaranteed minimum pension (GMP) conversion legislation may be used to resolve unequal payments.
This comes after the landmark judgment in October where the High Court ruled pensions provided to members who had contracted-out of their scheme must be recalculated to ensure payments reflect the equalisation of normal retirement ages in the 1990s.
Alongside the GMP industry working group, the DWP produced the guidance to assist occupational pension schemes that have yet to address inequalities.
The DWP outlined the staged process to adjust individual benefits, starting with the reconciliation and rectification processes in which schemes have to check they hold the correct GMP figures before resolving inequalities.
Reaching an agreement with the employer is the next stage of the process, where trustees and the scheme employer will identify and agree which members will have their benefits converted. Schemes must then agree the benefits to amend.
A date for conversion must then be set, following a pre-conversion consultation where trustees will write to the selected members to inform them of the changes and request their views on the conversion proposals.
The next stage is a valuation where trustees must instruct the scheme actuary to value each selected member's benefits to be converted, and the member's benefits in respect of the same part of pensionable service.
Schemes must then equalise, with payments adjusted to this effect. Following equalisation, schemes will need to determine the post-conversion benefit and turn it back into a revised pension benefit.
Certification follows, where the actuary will confirm that the calculations have been completed and the post-conversion benefits are actuarially equivalent to the pre-conversion benefits. The certification must then be sent to trustees within three months of completing the calculations.
The DWP noted the next step is the modification of the scheme to effect conversion, where trustees may resolve on the agreed basis.
Finally, post-conversion notifications must be released. The trustees must take "all reasonable steps" to notify the members whose benefits have been converted either in advance or as soon as practical after the conversion date. The notifications should state that benefits have been converted as at the conversion date (or will be if the conversion is yet to take place).
HM Revenue & Customs must also be notified on or before the conversion date that an individual's GMPs have been, or will be converted.
Pensions and financial inclusion minister Guy Opperman commented: "This vital guidance will provide pension trustees with the detailed road map they need to navigate this complicated equalisation process, ensuring they can meet their legal obligations.
"I am determined to ensure that pensions are fair for everyone and this guidance will help achieve this."
There is no single method that schemes must use to equalise benefits and it is down to trustees of each scheme to decide the most appropriate methodology. GMP conversion is one of seven methods approved by the court for equalisation.
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