GMP conversion guidance is expected imminently, but what will it mean for schemes? Maurice Titley looks at the next steps for trustees.
We're halfway through April now - so far this year, as an industry, we've managed to make our way to (but not yet through) master trust authorisation. We got a thumbs-up to pension dashboards - compulsion is coming and a suggested deadline of phased rollout within three to four years. We're taking cautious steps forward with CDC and a new look at IGCs.
On top of all this, we're on the cusp of the Department for Work and Pensions issuing its GMP conversion guidance.
The guidance is expected to be published before Easter - most likely tomorrow - and it should cover how the existing GMP conversion legislation could be used to equalise GMPs.
But as well as explaining how to equalise via conversion, we're hoping for some practical guidance on the associated issues. But, and there is a but, the government is considering further changes to conversion legislation - so this may not necessarily be the final word, and further updates may be needed in future.
So what does this guidance actually mean for the industry?
Many schemes have been holding out for the guidance before pursuing GMP conversion. Publication of the guidance means schemes can gain some comfort that they are tackling conversion and equalisation in an appropriate way. But what do schemes need to do before conversion? Only two things really…
Sort out their data!
- Split each member's pension into the required service periods. This will include identifying the pension accrued over the period from 17 May 1990 (Barber date) to 5 April 1997 (date GMP accrual ceased) with further subdivision of this element if the scheme equalised normal retirement ages during this period.
- Don't forget it's not just data in respect of benefits you're equalising. You'll also need data in respect of benefits accrued from 6 April 1978 to 17 May 1990 as the entire tranche of pension which includes GMP must be converted.
- Calculate the benefits a member of the opposite sex would have been entitled to in respect of benefits accrued from 17 May 1990 to 5 April 1997
- Equalise historic payments to date via alternative equalisation methods and rectify.
…and do everything else at once!
- Consider combining conversion, equalisation of historic payments with existing GMP reconciliation and rectification exercises as doing everything has some advantages:
- Creates simpler communications: Combining the activities allows for one communication to members making it easier for them to understand a single change to their benefits along with corresponding rectification payment in respect of both GMP reconciliation and GMP equalisation.
- Realises potential efficiency gains: Combining GMP equalisation with the rectification work is likely to result in improved efficiencies, such as identifying full data requirements at the outset rather than revisiting data multiple times for different purposes. This is also likely to reduce administration costs by enabling a single change to members' benefits.
- Improves timescales: Certain actions for later stages of the project should be carried out alongside earlier stages to avoid delay e.g. conversion legislation as it currently stands requires the trustees to consult with members and so the consultation could be carried out in advance and combined with other member communications.
The GMP story isn't over yet, with guidance also due from HMRC due on pensions tax issues e.g. for conversion, will a one-off increase to a member's pension post conversion result in undesirable tax consequences for individuals?
But it is only April and, if the past few months are anything to go by, 2019 could be another landmark year for pensions legislation.
Maurice Titley is a director at ITM