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GMP equalisation: time to get cracking

GMP equalisation: time to get cracking

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GMP equalisation has now been with us for nine months.  True, we still don’t know everything, but we know a lot more than when the Lloyds judgment first came out – certainly enough for trustees to take action and get the ball rolling.

This was very much the message we gave in our recent GMP equalisation seminar (a joint effort between ourselves at Buck and lawyers from Squire Patton Boggs).  At that seminar we unpacked some case studies, exploring exactly what schemes should be doing in the short term.  It was clear that some advisers are still in ‘wait and see’ mode, consciously letting other schemes be the first movers on this project.  However, that approach carries risk.

As one seminar attendee asked, what happens when the first schemes begin to equalise – perhaps in spring 2020 – and your members start calling up, asking what is happening?   Would it feel comfortable to have to reply ‘nothing’?  Moreover, trustees have a fiduciary responsibility to correct benefits when an issue comes to light, and it does not feel in keeping with that responsibility for trustees and advisers to sit on their hands for too long.

That said, nobody is advocating rushing to do this in a very short timeframe; that also carries a risk.  For example, making amendments to benefits before HMRC have issued guidance [on the tax implications of GMP equalisation] risks landing some members with sizable additional costs.

So then, what exactly should trustees be doing?  The industry GMP Equalisation Working Group (chaired by the Pensions Administration Standards Association), of which I am a member, has issued a ‘Call to Action,’ backing up similar messages as those raised in our seminar.  The working group highlights three key areas for action: data, impacted transactions and GMP reconciliation.

Data: GMP equalisation is going to require data and information that goes well beyond that which is held for the current operation of a scheme.  In many cases the information may be unavailable or unreliable.

How far should trustees go in terms of trying to obtain the missing information?  Should advisers be digging through boxes of archived paper files?   In some cases, yes they should.  However, there is a line beyond which the amount of effort required becomes disproportionate; trustees should work with their advisers and administrators to agree where that line is…

Impacted transactions:  Many schemes are now starting to make allowances for GMP equalisation in transfer values and other individual cases.  At Buck we have a standard assumption, which we recommend that our clients use for this purpose.  This ‘turns off the tap’ on the cases which may need to be revisited in the future.

Where schemes are undertaking (or have recently undertaken) an insurance transaction, such as a ‘buy-in’, trustees should speak to their advisers and to the insurer to agree the approach to take.

GMP reconciliation:  Many schemes are still going through the process of reconciling their GMPs with data held by HMRC.  Only a small minority of the attendees at our seminar thought that this process was complete for their schemes.  HMRC have said that some schemes will not get their final data until November 2019.

Once reconciliation is complete, some members’ benefits may need to be amended to reflect the new data.  In some cases, retrospective adjustments will be made to reflect under or over-payment.  A key decision for trustees is whether to implement these rectifications as a standalone project or whether to integrate this work with the broader GMP equalisation process.

There are pros and cons to both approaches.  Immediately pressing ahead with rectifications avoids any delay in making these corrections to members’ benefits (again, noting trustees’ fiduciary responsibility).  However, combining the two projects may be more efficient and means adjusting members’ benefits only once.  This also avoids the possibility that some members could see a reduction to their benefits following reconciliation, only to have it countered by an uplift following equalisation.

The industry working group is fairly neutral on which of these approaches is preferable.  However, the attendees at our seminar were almost unanimous in preferring a combined approach, with the key reasons being that it simplifies the message that needs to be communicated to those affected members.

These are exactly the types of in-depth conversations that trustees should be starting to have with their advisers and administrators as they get cracking with this project, in keeping with the industry call to action.   Let’s start talking about GMP!