Thought

The race to equalise GMPs…are we there yet?

GMP Equalisation has had a bumpy ride over the years and things do not appear to be looking up.

After a flurry of activity post the Lloyds judgement, the industry broadly settled on some early actions and a holding position.

  • Adding additional wording to Retirement and Transfer quotations
  • Equalising Transfers for some schemes
  • Equalising serious Ill-health retirement lump sums
  • Halting Trivial Commutations for the time being
  • Estimating additional liabilities for sponsors’ accounts.

After this initial storm, a pause. Most Trustees have decided to slow down further progress on GMP Equalisation. Further clarification is awaited on historic transfers, conversion legislation, de-minimis thresholds and implications in terms of tax. We are also awaiting input from the PASA-led cross-industry GMP Equalisation Working Group set up by the Pensions Regulator.

While in this holding pattern, there is an occasional flurry of activity. For example, I get intermittent emails from concerned clients asking how much pension administration charges will change under C2 as compared to D2. However, are we asking the right questions and is there really nothing more valuable that can be done for the moment?

There is much that is already known and work we can do to prepare ourselves for GMP Equalisation. Getting GMP Equalisation right is about the journey rather than the destination. There are a number of hurdles that need to be crossed prior to even making a decision on the equalisation methodology that is relevant to each scheme. Trustees, their advisors and administrators must start this process now. Here are a few of the questions that Trustees should seek to answer:

  • Are the Trustees clear how the various methodologies work and the advantages and disadvantages of each? This process of discovery can help the Trustees whittle down their options to a couple.
  • Have the number of members impacted been scoped? We have clients who have anything from 20% to 80% of their membership within scope of the project. The magnitude of the issue can drive different strategies.
  • What are the demographics of this population? Gender, age and salary for example? How will this impact likely liabilities and is there some concentration risk?
  • Have the Trustees run a data audit report to identify data gaps based on their preferred equalisation methods?
  • Are there opportunities to further harmonise benefits and convert tranches to simplify future administration and reduce future risk of errors and running costs?
  • Is there anything in the scheme’s Rules which will make the process easier or more difficult?
  • Do the Trustees understand any areas where employer consent may be required and does the relevant employer still exist?
  • Are all of the scheme Rules and addenda available and do the Trustees require an updated administration-relevant benefit specification?
  • Have the Trustees commenced work on any data cleanse required? The Trustees may need to review scanned files, historic documents, microfiches and sponsors’ records, or even correspond with specific members to obtain past records.

All of these steps can be progressed today. Completing them is non-linear as there are a number of dependencies between steps. We can also confidently state that the industry expects a major resource crunch when all impacted schemes across the country attempt to upgrade their schemes to the point where the GMP Equalisation process can actually commence, so it will be wise for Trustees to get their projects into the queue early.

The actual decision of which methodology to use, how much it will cost to equalise and the impact on ongoing administration post-equalisation is actually a secondary issue that will need to be considered only after this initial phase is completed.

As with any long journey, we need to start with a map, plan the route, agree interim objectives and firm our timelines. This will make the journey enjoyable, rather than merely focussing on when we reach the destination.

Originally published on Professional Pensions.

Girish Menezes

Head of Administration

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