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Are You Ready For GMP Equalisation?

15 October 2020

The spectre of GMP equalisation has been hanging over every contracted out occupational scheme for over 30 years. But the 2018 Lloyds case in the High Court upped the ante. Recent research from EQ revealed six out of ten pension professionals say GMP Equalisation is a priority project over the next 6-12 months, up from just 13% the year before.

What schemes must do now is prepare to engage actively with the equalisation process. That means going beyond remaining compliant, to proactively prepare for the future.

GMP Equalisation: What To Do Now?

The greatest obstacle to beginning a major project such as GMP equalisation is not knowing where to start. It should not be. Data is at the heart of the process and is a perennial problem for most schemes, which makes it an obvious place to start.

For active and deferred members, getting on top of any scheme data imperfections will pay dividends over time. For pensioners and dependants, a more nuanced approach is required. Historical data work should be targeted, proportionate and have clear purpose. There is a widely misconstrued view that past calculations will require reconstruction as a matter of course. This is not the case.

 

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Stop delaying, start preparing.

For most schemes and the vast majority of pensioners, accurate GMP equalisation adjustments and arrears can be calculated from readily available member data starting with the current payroll. This nuanced approach will allow finite data budgets to be focused on the pensioners where it really matters. Expensive and data intensive reconstruction should only be used where it is strictly necessary.

Let’s get down to calculations

There are multiple approaches which schemes can take to establish their equalisation methodology approach, affectionately known as the C2/D2 debate. This will need to take into account the opinions from sponsoring employers, their actuaries and their lawyers, understanding the impact on future administrative practices and the resulting impact on scheme liabilities, whilst appreciating the cost to do so.

With that in mind, it is no surprise that this monumental task cannot be completed overnight. Although the eventual act of equalisation could be some time in the future, it is no excuse for firms to continue postponing the problem – they must start preparing now.

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What should your strategy be?

The most sensible approach for schemes is to be proactive. Take a considered approach by understanding and establishing an equalisation strategy. Although this is not ground-breaking advice for schemes, it is a regular occurrence that other priorities often get in the way. This is natural and understandable but this journey will be long, complicated and costly. Being prepared, measured and strict in terms of addressing this subject early will pay dividends in the long run.

5 Steps To Prepare Your Scheme For GMP Equalisation

The industry is still awaiting further legislation and guidance to help navigate schemes through what is expected to be the most complex, multi-faceted industry-wide undertaking that they have ever had to face. It is said that a thousand-mile journey begins with a single step, so EQ have put together a new infographic to help you be smart, plan early and get equalisation ready in a considered manner.
  

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Once you have run through these preparation steps, decisions can be made on what scheme rules need to be clarified, i.e. whether to take past calculations back 6 years or back to the start of GMP in 1978. How does the forfeiture rulings of the scheme impact this decision?

Those schemes which leave the work to the last minute will inevitably be chancing their luck. This should be thought of as a marathon rather than a sprint.

GMP Equalisation: Made Simple Guide

GMP equalisation is a complex and long-term project with significant implications for many defined benefit schemes. This new Made Simple Guide, produced in partnership with the Pensions and Lifetime Savings Association, covers the history, the methods and the roadmap for the future to help trustees prepare for and begin their GMP equalisation project.

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