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GMP equalisation and lessons for Brexit

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We have been working with many of our Defined Benefit (DB) scheme trustee and sponsor clients on the implications of both Brexit and GMP equalisation. It occurs to us that the two issues have surprisingly much in common.

Both began with decisions on simple points of principle. In 1990 the European Court of Justice decided that occupational pension benefits should be equal for men and women. In 2016 the British electorate decided that the United Kingdom should leave the European Union.

Only later did the complications become apparent. In the case of the Barber judgement, Guaranteed Minimum Pensions had to be equalised and affected schemes knew that they had an additional liability – but there was no agreed method on how to do it. It has taken 28 years of procrastination by various governments before the High Court finally gave the industry guidance on how it could be done – although even now our clients have a number of approaches they can use.

One simple question…

The Brexit referendum decided that the UK should leave the European Union, but not how. The 23 months of arguments that have raged in government, in Parliament, in business and elsewhere since Article 50 was triggered looks short in comparison to the period for resolving the GMP equalisation problem. The former chancellor Kenneth Clarke summed it up well by saying that the referendum was one simple question with a hundred difficult questions wrapped inside. What would Brexit mean for citizens’ rights? For trade? Would we remain in the single market? What regulations would we keep and what would we jettison? What would it mean for Northern Ireland? With less than 750 hours until the notice period expires, we still we do not know the terms of withdrawal – or even if it will actually happen.

Tactical decisions

Dealing with the uncertainty of the Brexit outcome has, in many cases, been more important to our clients than the expected implications of the different types of Brexit. At Buck, we have been helping our clients to manage that uncertainty. We have helped them make important tactical decisions on the acceleration of de-risking, tilting equity portfolios to non-European domiciles, and hedging currency. What is clear is that there is no single solution for all – each of our clients has a different threshold when it comes to uncertainty and we have been working with each of them to determine whether Brexit breaches that threshold before deciding what, if any, action is needed.

It’s true to say Brexit has already done some damage to the economy. While other global factors were at play, Q4 2018 was not a good quarter with equities having a torrid time, gilt yields having fallen, and consumer confidence on the decline. The DB schemes of those clients who made changes before this have probably fared better. But ultimately this is not good news for them, least of all those DB schemes that are going through or will soon face an actuarial valuation. There will be real pressure on DB stakeholders to make good the losses, through extra contributions that could otherwise have been used to support businesses after Brexit. And the penalties for trustees and DB sponsors getting it wrong are now severe, with the Pensions Regulator threatening jail terms in the worst cases.

We think the uncertainty and negative implications of Brexit for DB schemes is likely to continue for weeks, months and years to come. Hopefully though, we won’t have to wait the 28 years for more certainty, like we have for a solution to the GMP equalisation problem.

 

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