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Let’s stop skirting around anti-franking

Let’s stop skirting around anti-franking

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GMP has been left un-equalised when most schemes equalised their non-GMP benefits following the Barber judgement.  Let’s face it: it’s not an easy task, otherwise it would have been yesterday’s news and we wouldn’t still be here talking about it almost 30 years on.  But that ship has finally set sail following the Lloyds judgement in 2018, and there is no holding it back!

The pensions industry has rallied and worked tirelessly despite the challenges the ongoing pandemic presented.  Although there is still some way to go, there is now enough guidance and clarity, with the latest supplemental guidance on anti-franking being issued just last month.  We have seen trustees really kickstarting the GMP equalisation process in recent months (if not before).

Anti-franking is a test that is carried out at GMP payment age to check that a member’s pension meets the minimum specified by legislation.  ‘Franking’ refers to offsetting pre-retirement increases on GMP against pre-retirement increases on non-GMP, which is not allowed in most cases – hence ‘anti-franking.’

So, is anti-franking just another quirk in the cobweb of the complex GMP world?  Or is it really a can of worms that nobody wants to open? The short answer is no, it is not just a quirk – unlike many aspects of this project, it does impact members’ pensions, in some cases by thousands of pounds.  Whisper it quietly, but even some actuaries and other advisors might be tempted to bury their heads in the sand until they absolutely have to face it!

Trustees, if your advisors haven’t reached out to you, you can keep them on their toes while sounding like you really know your stuff, by asking them what their plan is on anti-franking.  You can get the conversation going by asking them these seemingly simple questions such as “what is the anti-franking minimum?,” “who does it apply to?” and most importantly ,“what is the current anti-franking administration practice?”  If you don’t understand the answers you get, keep asking until you do.

You may find out that your scheme’s anti-franking test doesn’t meet the strict legislative requirements.   In this case, there is no need to panic – there are a range of plausible and established practices – but getting legal input is important.  It is important to do a ‘screening test’ of your members, to establish for which members the test is potentially material and where a change to practice may be needed.  These members are likely to be those for whom some or all of the following apply:

  • Their normal retirement age is less than 65
  • A significant proportion of their pension is GMP
  • Their non-GMP pension does not increase after retirement
  • The scheme doesn’t provide revaluation on GMPs on retirement before GMP age

If a change to administration practice is required, you will need to discuss with your advisors whether any corrections to past pension payments are needed in conjunction with the GMP equalisation project.

A particularly fun element of anti-franking is how to apply the test to pre-1990 and post-1990 GMPs once GMP equalisation is complete.  Given anti-franking is a ‘whole of service’ test at GMP payment age, it is not straightforward on how to carry out this test in practice: for example, by completing the test separately for pre-1990 and post-1990 benefits.  The supplemental anti-franking guidance mentioned earlier can help tackle this tricky point.

A related point is the later earnings addition (LEA), an adjustment that usually applies to female members who worked beyond age 60.   Sadly, I’ve run out of space in this blog to go into that..! But suffice to say, similar points apply to those mentioned above in relation to anti-franking.

Just when you think this is not too bad after all (!), don’t forget that most schemes would have more than one normal pension age as a result of the Barber equalisation.  This adds a further layer of complexity and there is no definitive answer on how to approach this in the PASA guidance.

Ok, I’ll stop now – but trustees, do make sure you actively raise these points with your advisers, to avoid them kicking the can down the road on this complex but critical aspect of the GMP journey.