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GMP Equalisation: Who does it affect?

Monday, 24 August 2020

By Stewart Winter, Operations Director, Data Solutions, EQ (Equiniti)

The High Court case may have concerned only the schemes of Lloyds Banking Group, but the judgment provides a legal precedent for all other affected schemes.

stewart-winter Stewart Winter Operations Director, Data Solutions, EQ

It could be you

The need for occupational pension schemes to adjust scheme benefits to remove the inequalities that arise from unequal GMPs should come as little surprise. The Department for Work & Pensions (DWP) had maintained this line of argument since 2010. But how do you know which schemes will be affected?

Many UK defined benefit (DB) pension schemes with members who built up a guaranteed minimum pension (GMP) between 17 May 1990 and 5 April 1997 will be on the list. So will some defined contribution (DC) schemes that have a GMP ‘underpin’ benefit.

Complicated sums

Schemes will need to recalculate benefits over a period of almost 30 years. This will be onerous and may prove complicated.

Next, schemes must determine which calculation methodology they will use . Trustees should follow the method that requires the least interference with the benefits of any group of members. The exception comes if the employer agrees to a more generous method, or to GMP conversion. Trustees should also consider whether they will be required to adjust future transfer values to reflect the judgment.

Any change will require the funding of these additional benefits. Employers will have to decide what impact this may have on their financial performance.

Who must be considered?  

Trustees should also know if they have considered the GMP equalisation, where:

  • A scheme is winding up or has recently been wound up;
  • The trustees have entered into a buy-in, or are in the process of negotiating a buy-in or buyout; and
  • A recent corporate transaction has taken place.

A number of member groups may have received underpayments in the past and trustees should be aware of how the scheme treated:

  • Pensioners in receipt of benefits who have only ever been advantaged compared to their opposite sex comparator. There are no past underpayments for this group.
  • Pensioners in receipt of benefits who have always been disadvantaged require a correction.
  • Pensioners who have crossed over from being disadvantaged to advantaged (or vice versa). The calculation of past underpayments will depend on whether the scheme adopts a cumulative approach.
  • Survivors in receipt of benefits following the death of an active, deferred or pensioner member who may or may not have been disadvantaged in the past. The deceased member may have been disadvantaged if they died in retirement. This includes children and financial dependents, even though they will have no GMPs.
  • Former members who took a transfer value from the scheme or whose benefits were secured by an individual annuity in the name of the member.

Nearly there, now

There are a number of ‘no further liability cases’ (NFL) that must also be reviewed. NFL cases are ones that trustees or the employer have decided not to incur further costs in trying to review and correct past payments. The members in these groups include:

  • Those who received payment of trivial lump sums;
  • Where the death of a member/survivor has occurred with no further benefits payable; and
  • Where the payment of serious ill health lump sums were made, but where no survivors’ pension is payable.

Finally, deferred and active members need not be considered for underpayments, as they will have received no benefit payments, yet. However, they must be included in the considered of future equalisation exercises.