GMP equalisation: pension schemes on uncertain ground
The government has published its response to its November consultation on Guaranteed Minimum Pension (GMP) equalisation and other contracting-out issues. Willis Towers Watson welcomes some of the decisions made, including some changes from the original proposals, but warns that significant issues still need to be resolved before schemes can move forward with confidence.
David Evans, senior consultant at Willis Towers Watson, said: “The Government has reiterated its position that equalising benefits for the effects of unequal GMPs is a legal obligation while the UK is in the EU. It has not said whether it would consider changing this after Brexit. That is unsurprising – the Government’s position on all EU law is that it will continue to apply straight after Brexit, with Parliament then taking its time to consider what should stay and what should go, and it was never likely to make an exception for GMPs. However, this, together with a prospective court case, leaves schemes on uncertain ground as to what they need to do. In addition, the Government has committed to discussing some of the technical details further with an industry working group which will also add uncertainty for schemes.
“The proposed method for equalising benefits is based on the idea that schemes should look at the overall value of male and female benefits and give members the higher of the two. This is broadly what has happened when schemes have needed to confront GMP equalisation in order to buy out benefits with an insurer. The increases to members’ benefits are smaller than under the approach proposed in 2012, which would have given each member the higher of the male benefit and the female benefit in every year. But that doesn’t mean members have lost out: employers were likely to resist paying for what some considered to be unnecessary gold plating of the benefits they originally promised, and the new methodology has more chance of being used where schemes are eager to get on with it.
“The ball is very much in the court of schemes themselves as to what action to take to equalise benefits. With the potential Lloyds Trade Union case on the horizon, it seems likely that many pension schemes will continue to reserve their judgement on equalisation until such time as the position is clarified, despite the Government’s belief that action is required. By resisting calls to provide a legal 'safe harbour’ for schemes moving forward with equalisation using this approach, the Government has made further delay more likely.”
GMP conversion on the horizon, but some way off?
Evans said: “As the response highlights, the industry welcomed proposals to amend GMP legislation to make it easier for schemes to convert GMPs into normal scheme benefits. This would strip away some of the complexity that is a legacy of contracting out and increase flexibility for scheme members, for example making it easier for a member to retire early and in some cases allowing more tax-free cash at retirement. However, there is no indication as to when there might be a further update, nor of a timeline for implementing changes to the GMP conversion requirements. As regulations will be required to make the changes proposed, we suspect that these issues will not be resolved until April 2018 at the earliest.”
Compromise on GMP revaluation
Evans said: “We are pleased that the DWP has listened to consultation responses (including our own) in confirming a fixed rate revaluation rate of 3.5% per annum on GMP for members leaving service from 6 April 2017 rather than their initial proposal of 4.0%. This provides a better balance between the interests of scheme members and sponsors but will usually have only a modest impact, if any, on scheme funding levels – most GMPs in pension schemes relate to those who have already left service.”
Help for schemes completing GMP reconciliations
Evans said: “The response confirms that the proposed changes to Contribution Equivalent Premiums (which buy people back into the State Scheme for short periods of contracted-out service) will go ahead as planned. We welcomed the original proposals to extend the circumstances in which CEPs can be paid as a helpful move for schemes currently grappling with a large number of discrepancies between their records and HMRC’s, as this will lead to cases relating to small amounts of contracted-out service being more efficiently resolved, and allow schemes to focus their resources on reconciling more material differences. This will benefit those members whose benefits can now be reconciled, who may see a small boost to their State pension.”
Some progress on bulk transfers
Evans said: “Sometimes, employers need to transfer a group of members from one pension scheme to another, for example after a corporate restructuring. The consultation response recognises that the law creates a problem here because you can only transfer contracted-out benefits into a contracted-out scheme, but it is no longer possible to set up such a scheme! The Government says it is considering this urgently and hopes to be in a position to consult by the autumn. There will have been a long gap between April 2016 – when contracting-out was abolished – and this issue being resolved, but we might now be getting somewhere.”