Pensions - Articles - Major risks if delaying transfers while equalising GMPs

 Members who accrued benefits in ‘contracted out’ defined benefit schemes are entitled to a GMP to replace the state earnings related pension they gave up. The recent ruling on the Lloyds Banking Group pension scheme mean GMPs accrued between May 1990 and April 1997 must be equalised. 

 Steven Cameron, Pensions Director at Aegon said: “It’s extremely worrying to hear that many trustees are putting transfer values and payments on hold while considering how to equalise GMPs. There continues to be heightened interest in switching from defined benefit to defined contribution scheme, driven by the new pension freedoms, concerns over the security of some employer arrangements and transfer values looking particularly high because of low gilt yields. The FCA has recently clarified its expectations for advising in this field, which should help the supply of advice catch up with strong demand. But if trustees put quoting for or paying transfers on hold, they not only risk missing legislative requirements on time scales, they could also be storing up major risks if interest rates rise.

 “While who benefits, and by how much, may vary from scheme to scheme, GMP equalisation won’t reduce anyone’s entitlement, so trustees shouldn’t need to delay quoting or paying transfers for fear of overpayment. The most common sense solution is to proceed on the current basis and to make a second instalment where future calculations show the transfer value paid understated the member’s entitlement. With all the uncertainty of Brexit ahead, it would be a brave trustee who assumed gilt yields won’t rise in future, leading to transfer values reducing. And there’s every chance a small enhancement for GMP equalisation could be more than wiped out by a larger drop caused by interest rate increases.

 “It’s likely to take months if not years for all schemes to complete GMP equalisation, which makes it important for the Government and the Pensions Regulator to clarify how it expects trustees to respond to transfer value requests. We strongly believe this should be on the basis of a top-up payment where an individual benefits from GMP equalisation. This approach would also allow advisers to proceed with transfer advice.”