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Pragmatism in GMP Equalisation: Potential Short-Cuts to Method C2

Pragmatism in GMP Equalisation: Potential Short-Cuts to Method C2

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Ever since GMP equalisation reared its head in October last year, industry experts and advisers have been laying it on thick in terms of the potential complexities.

Just as a car mechanic might shake his or her head while surveying your car, clocking up how many ‘repairs’ are needed to get your car back on the road – so too have great lists been drawn up of technical issue upon technical issue that will make GMP equalisation lovely and complicated and run on for years and years. Kerching, kerching.

To be clear – I’m not saying here that GMP equalisation is at all straightforward. It will be a sizeable project, with strong legal and actuarial advice a must throughout the process.

However, it is important to bear in mind that GMP equalisation is likely to have a modest financial impact for most pension schemes, and add pence, rather than pounds, to the average pensioner’s weekly income. This is a time when a pragmatic approach should be the way forward (subject of course to meeting legal and professional requirements).  This is nothing new: actuaries have been taking robust yet pragmatic approaches to equalisation and rectification projects for years – why should this be any different?

It sounds complicated…

One of the key areas of complexity which has driven many column inches in the pensions press is the need to hold and monitor multiple administration records for each member. This may be needed for schemes which use the method labelled ‘C2’ in the Lloyds Judgment – which is one of the two main approaches likely to be used to deliver GMP equalisation.

Under method C2, ‘male’ and ‘female’ pension records are held for each member. A process is set up to calculate the cumulative male and female pensions over time (with interest). Each month a check is completed to see if the cumulative male or female pension is ‘winning,’ which then dictates which pension is paid to the member in that month.

Typically the female pension will initially ‘win,’ because of the higher GMP amount. Over time the male pension may catch up and overtake the female pension, depending on the levels of increases applied to the different bits of pension.  If that happens the member’s pension ‘switches over,’ leading to a jump in their pension amount.

Sounds complicated, right?

…but is it really?

Perhaps, but not necessarily…

Important point number one: the amounts are likely to be very small in most cases. This ‘jump’ in pension is highly unlikely to buy you any part of a Lamborghini.

Important point number two: yes it is complicated, but it’s just a new process. Once set up, it can be built into the normal running of the scheme without too much bother – nothing that good administrators haven’t already been handling perfectly well for years.

Important point number three: this ‘switch over’ is actually very unlikely to occur in a large number of cases. Based on the modelling we’ve completed at Buck, you need a fairly specific benefit structure coupled with high rates of future inflation before you get any switch at all.

Short-cuts, and a short word of caution

For many schemes, or for membership categories within schemes – in particular those with low (or no) guaranteed increases in payment for pre-6 April 1997 pensions – you may conclude that the male pension can never overtake the female pension and so the switch can never happen. This short-cuts a chunk of the complexity for method C2.  Great.

For those schemes that have the potential for a ‘switch over,’ once again I say that the amounts are likely to be very small. An alternative approach for these cases may be to use a marginally more expensive but slightly simpler method, such as method ‘B,’ which does away with the cumulative aspects of the monthly comparison.

To re-iterate what I said at the start, GMP equalisation is going to be a large and tricky project. However, through careful pragmatic advice, some of the pain can be avoided.   What we want is to get the car through its service and back on the road – we don’t necessarily need to flush out the radiator and respray the bonnet.