Articles - Avoiding the pitfalls of GMP equalisation

Five months after the High Court judgment on guaranteed minimum pensions (GMP), companies and trustees are starting to get to grips with the steps needed to meet their new legal obligations. The ruling in the Lloyds Banking Group case means schemes must correct benefits built up in the 1990s to ensure equal treatment between men and women.

 By Mark Williams, Principal & London Retirement Practice Leader, Buck
 The financial impact of equalisation is likely to be very small for many members, and the total impact on scheme liability values is likely to be within 1% in most cases, but the scale of the project nevertheless means it could end up being a complex and expensive exercise. 
 Getting GMP equalisation right, and avoiding the potential pitfalls, is therefore crucial for both companies and trustees alike.
 Don’t shut out the lawyers
 A key mistake trustees could make is to try to go it alone on GMP equalisation without obtaining legal advice. Lawyers can be expensive, and schemes may be reluctant to get them involved, but this is a project where clear, targeted legal advice is imperative to avoid nasty surprises further down the line.
 Obtaining legal advice will also help determine which methods of equalisation are best aligned with their scheme rules and address particularly thorny issues such as the period over which any back-payments are made or the handling of transfers.
 Communicate at the right time
 Member communication is one of the biggest challenges of GMP equalisation, and there may be a temptation to get in touch with members quickly. However, this is a topic where holding off on doing so may be the prudent approach.
 GMP equalisation is an extremely difficult concept to explain to members – many pensions professionals struggle with it – so it’s not something that can easily be communicated succinctly in a short statement or newsletter. Attempting to do so, risks mis-managing expectations – members may expect a windfall when the reality is likely to be a few extra pounds per week (if that) – or causing undue concern.
 In general, people do not like it when their pension is messed around with, even when the change is a beneficial one. The best approach is likely to be to wait until the full picture is known, including the size and nature of any changes to benefits, before setting that out in a single clear and well thought-through message.
 Ensure efficiency
 Letting the project drag on for years is another potential pitfall that trustees (and companies) should try to avoid. GMP equalisation is a complex task which could easily end up sitting on meeting agendas for years, while the expenses rack up.
 Some consultancies have suggested the process could take three to four years, but with solid project management, good advice and quick decision making, a shorter timeframe is eminently achievable.
 Combine two GMP projects
 Work has been underway for some time to reconcile schemes’ GMP data with that held by HM Revenue & Customs. Careful planning is needed to ensure strong alignment of the outcome of this project, and GMP equalisation.
 It will cause inefficiency and exacerbate the member communication issue if members receive separate inconsistent messages about changes to their GMPs within a few months. In many cases it will be a sensible and efficient approach to combine implementation of the two projects.
 Don’t overstate the complexity of method C2
 Two main methods have emerged for implementing GMP equalisation: ‘C2’, which is based on a detailed comparison of pensions over time and ‘D2’, which involves a one-off actuarial calculation to convert GMP to other benefits.
 Market commentary on method C2 has focussed on the complexity of the ‘cross-over’ point, the moment when the member’s benefits may switch from the ‘male’ to the ‘female’ benefits or vice-versa. However, in some cases schemes are set up in a way that makes this switch highly unlikely or impossible. If this is the case, some of the key drawbacks of method C2 – in particular the future administration complexity – may fall away. It is very important for trustees and companies to analyse and recognise this within the C2 vs D2 debate.
 Recognise the opportunities of method D2
 Another facet of that debate is the potential opportunities that exist through method D2 (GMP conversion). As well as the general simplification of benefits and, hence, administration, D2 offers some key opportunities for trustees and companies to reduce risk and costs.
 Simplifying the scheme’s benefits is likely to improve the pricing offered by insurers to take on the scheme’s liabilities. There are also opportunities to simplify benefits and reduce risk further through a member options exercise such as a ‘Pension Increase Exchange’. These opportunities provide potential financial benefits, which could offset the costs of GMP equalisation.
 Balance robustness and pragmatism
 Make no bones about it; GMP equalisation is going to be complicated. In particular, it will involve undertaking a significant amount of work to unpick and reconcile historical data – much of which may be held in paper files, if it exists at all. However, while preserving the robustness of this process, it is perfectly possible to take a pragmatic approach to addressing some of the issues, in order to put a limit on the size and cost of the project.
 Without this layer of pragmatism, there is a risk that the amount of work completed is hugely disproportionate to the financial impact of the exercise on members’ pensions, which in many cases is likely to be small.
 Furthermore, there is a risk that this project distracts trustees and companies from their long-term strategic planning, an area which does have huge benefit for the scheme and its members and in which many schemes have made great strides in recent years.

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