Henry Tapper says the Lloyds GMP ruling will see little benefit for members but profound fees to administrators.
The adjudication of Justice Morgan over guaranteed minimum pension (GMP) equalisation has triggered some hair-raising headlines in the national press and a flutter of emails from law firms in our inboxes. But what will it mean to those professionally engaged in pensions and what will the impact be on our clients?
I suggest that its immediate impact will be on corporate balance sheets. The extra liabilities arising from the ruling will need to be measured and accounted for. Under accounting rules, the extra liabilities will be marked to market and will typically amount to between 1% and 4% of existing liabilities. This is what most boards are likely to be most concerned about.
But there are also immediate cashflow considerations to employers. Here I'm going to have to get technical - bear with me! It seems unlikely that the actuarial equivalence test (D1), widely used in buyouts to equalise, will be able to be used going forward. It is possible that a more radical version could be used (D2) which does away with GMPs altogether.
However, this version looks clunky and could result in members actually receiving less pension initially in return for the promise of greater indexation. As anyone who has been involved in pension increase exchange projects will know, getting people to take less upfront in exchange for more later is swimming against the tide. Until the Department for Work and Pensions (DWP) steps in and offer some clarification, D2 looks very difficult.
If the blanket actuarial methodologies can't be employed, it looks like individual testing by pension administrators will replace them. This will involve a lot of data cleansing, considerable investment in pensions software and a lot of ongoing manual work. The actual cost to schemes of testing GMPs could exceed the amounts paid out.
If I am right in my prognosis, then the implication is for advisers to follow the same path. Actuarial consultancies will not look happily on Justice Morgan's comments. Unless their practices offer pensions administration, they may well find themselves excluded from the remedial work. On the other hand, third-party administrators and actuarial practices with administration-centric client offerings are likely to profit from the ruling.
While it is too early to predict what the value-shift towards administration is likely to be, estimates of an administrative charge of £25 per person per annum suggest that they could be profound.
Finally, we have to consider the most important part of the equation: the impact on members. The complexity of the ratiocination between state- and scheme-funded increases means that there are no clear winners. Men, as well as women, may be better off. Union assessments of how much better off have been widely published but I understand the impact on Lloyds is likely to be closer to £100m, putting its impact at around 1% of liabilities.
In such cases, nearly three-quarters of members would not be impacted by the judgment and - using the union estimates - only around 3% of the membership would get a lifetime benefit of £3,000 or more. In terms of transfer value equivalence, that's not even £10 per member.
So (at least in Lloyds' case) the member impact is hardly the windfall that the headlines have made it out to be, it will benefit men as well as women, and it won't be paid upfront but as extra pension to a small proportion of members.
The impact on the membership of other schemes will vary and no doubt there will be some schemes where members will see material pension increases. But for the most part, the reaction of those within and outside the pension industry is likely to be the same.
What a waste of time and money.
Henry Tapper is business development director at First Actuarial
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