GMP Equalisation - Made Simple Guide
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GMP Equalisation - Made Simple Guide

29 June 2020

By Duncan Watson, CEO, EQ Paymaster

The matter of guaranteed minimum pensions (GMPS) may appear to have assumed great importance almost overnight, but in truth, it’s been a long time coming. 

Duncan Watson 480X320px Duncan Watson CEO, EQ Paymaster

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.

Doing nothing – or considering one’s options – is no longer considered to be the same as taking a long term view. That does not mean that schemes and employers must put their collective shoulder to the wheel in order to wrap this project up in double quick time.

The process of equalisation remains a long game. There is no complete roadmap available, yet. And even if you have begun that journey, your destination is likely to be a long way off.

Guidance and insights will continually be offered by The Pensions Administration Standards Association (PASA). Meanwhile the Government continues to contribute to this process through the efforts of working groups at both the Department for Work & Pensions (DWP) and HMRC. The HMRC working group published its latest guidance in February 2020.

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.

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. The GMP reconciliation is top of the list – so you start with the right GMP figures. 

For active and deferred members, getting on top of any scheme data imperfections will pay dividends over time. This is an opportunity to invest and scrutinise the existing TPR common and scheme specific (conditional) reports.

For pensioners and dependants, a more nuanced and intelligent approach is required.  A scattergun approach to historical data is wasted resource. Historical data work should be targeted, proportionate and have clear purpose. There is a widely misconstrued view that past claim calculations will require reconstruction as a matter of course. This is not the case – it would be using a sledgehammer to crack a nut. 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.

It is said that a thousand mile journey begins with a single step. Don’t get off on the wrong foot by thinking this can be managed by a subcommittee, through occasional admin reports or by an in house team.

For your scheme’s GMP equalisation project to be a success requires all of your team members to be fully briefed and pulling together for the cause. This is not to be considered optimal, but paramount.

Schemes must involve all stakeholders and advisers from the start. And that means everyone: sponsor, actuary, investment consultant, lawyer, administrator, even technology partner. Without all these groups working together, then the notion that GMPs represent a nightmare project will become a self-fulfilling prophecy.

That doesn’t mean it is going to be easy. It will stretch resources and try everyone’s patience. But GMP equalisation must be achieved, and if your team doesn’t pull together as one, the project will take considerably longer. There are many opportunities to shorten the road.

With the bill estimated at anything up to 4% of liabilities, that would have an obvious – and unpleasant – impact upon costs.

We recognise that GMP is hard to get to grips with. But it must be dealt with and so we offer this Made Simple Guide as an introduction to this highly complex subject.

We hope you find it useful and would welcome any feedback you have on the guide or the subject in general.

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