Pensions - Articles - Accounting implications of GMP equalisation

With the results of the Lloyds Bank case expected next month, Guaranteed Minimum Pension (GMP) equalisation may become a reality for many schemes in the very near future. It is important to anticipate the implications this may have for companies’ year-end accounting.

 By Martin Hooper, FIA, Associate at Barnett Waddingham
 A brief history of GMP equalisation
 In a previous post, we explained the history and the developments of the last few years with regards to GMP equalisation and how this may impact schemes.
 As a reminder, GMP is a special tranche of pension for contracted-out service prior to 6 April 1997, intended to replace a sacrificed part of the state pension. In July 2018, Lloyds Bank went to court together with its pension scheme trustees and trade unions, seeking clarification as to whether its pension schemes are obligated to equalise GMP benefits between members of different sexes. It is expected that the High Court will provide greater clarity on the nature of such obligations and may set industry practice with regards to the methodology to be used.
 Year-end implications
 The effect of GMP equalisation on corporate accounts will depend on the method employed and the specific requirements that may arise from future guidance or legislation. If the Lloyds case results in greater clarity on the matter, it is expected that auditors will expect a reasonable estimate of the impact of the change in obligations. It is likely that companies will have to recognise additional liabilities in their 2018 year-end accounts as a result.
 It is unclear at this time what the appropriate approach of accounting for GMP equalisation will be. Based on preliminary consultations with audit firms, it appears that auditors are leaning towards treating these liabilities as past service costs. If this were the case, auditors would consider the impact of GMP equalisation on scheme liabilities to represent a P&L charge.
 The impact is very much dependent on individual schemes’ benefit structures, but based on our experience to date we might expect to see overall liability values increase by around 1%-4%. For many companies this could be a huge impact on P&L.
 It remains to be seen if there will be any flexibility with regards to how the additional liabilities are recognised. A potential alternative to the above approach would be to treat them as a remeasurement in other comprehensive income, leading to no P&L charge. It may also be possible to restate prior year figures on the grounds that there was always an obligation to equalise GMPs.
 How can we help
 Due to the potential of a significant P&L charge as a result of the Lloyds Bank court case, it is important to engage with this issue well ahead of the year-end and be prepared for any adjustments that have to be made to disclosures to account for GMP equalisation.
 To this end, we have prepared a tool for estimating the impact on liability value which will allow clients to incorporate consistent predictions into their accounts.
 We will also continue to discuss this issue with auditors prior to year-end and will provide continued updates on emerging practice to aid our clients with their disclosures.

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