How Do You Calculate GMP Equalisation?
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How Do You Calculate GMP Equalisation?

01 September 2020

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

A number of alternative methods may be used in the calculations for GMP equalisation. Few schemes had made adjustments to equalise GMPs. But the Lloyds Bank case confirmed that benefits must be adjusted to achieve GMP equality. It was also very clear that this should have been happening since the Barber judgment of 17 May 1990.

Stewart Winter Operations Director, Data Solutions, EQ

Inequalities will vary according to the specific designs of a scheme’s benefit structure. But all schemes starting an equalisation project must review payments made in the past to correct any examples of underpayment.

Past payments should be reviewed using a year by year approach for all members with pensionable service between 17 May 1990 and 5 April 1997, the date that GMPs ceased to be accrued in contracted out schemes.

A payment to correct the GMP is due where a member’s comparator – their equivalent of the opposite sex – would have received a higher benefit.

Show your working out

This year by year approach requires schemes to operate a shadow pension record to track the pension each member received against the pension their comparator would have received.

Shadow records are created from the member’s date of retirement, tracking forward to compare the benefit paid to the member against what that benefit would have been had they been the opposite sex during the period 17 May 1990 to 5 April 1997.

In its judgment, the High Court approved three different year-by-year approaches, referred to as methods B, C1 and C2 . A fourth, method A, was opposed by the employer as the most expensive approach. 

The popular choice

In reality, there are two leading methods that ongoing schemes are most likely to consider – C2 and D2. Some schemes may adopt B instead of C2 to avoid its complexity.

C2, which provides the higher of the male and female comparator pension each year, subject to accumulated offsetting, with interest should be applied first and the data retained. It may never be used for pensions in payment, but is the calculation to use to retain accurate GMP records.

Schemes approaching a GMP conversion will use D2 having run their calculations under the C2 method.

D1, like D2, compares an actuarial value of unequalised benefits with those of an opposite sex comparator. If lower, the member will receive additional pension. However, D2 then converts GMP into non-GMP benefits and is the method expected to be preferred by insurance companies offering bulk buyout contracts to schemes.

The ultimate decision

The Lloyds Bank case may have indicated a number of acceptable methods of GMP equalisation, but trustees and sponsoring employers must determine which is the most suitable for their scheme.

In some cases, member consent may be required if benefits are being converted. For instance, any changes could adversely affect fixed protection in place, causing a breach of their lifetime allowance, resulting in a sizeable tax liability for the member.

Another influencing factor is the number of members affected, as there should be no difference for members between the three methods.

Cumulative methods such as C1 and C2 require more complex administration and as a result, their implementation is likely to be more costly.

The last factor to consider is how simple it will be to communicate the decision made – and any calculations it generates – to your members.

Talk to us today about your GMP equalisation, reach out to the team below.