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GMP equalisation: cost will be lower than feared, as “method D2” hits the front

GMP equalisation: cost will be lower than feared, as “method D2” hits the front

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For those of us who are excited about GMP equalisation, it just got more exciting… There has been a further High Court judgment…

At Buck we consider this means that GMP conversion (“method D2”) is now the overwhelming frontrunner for pension schemes to use for GMP equalisation. This will result in defined benefit pension schemes and employers incurring lower costs than have been feared across the pensions industry.

GMP conversion – which has actually existed for some time but has seldom been used in practice – involves the re-shaping of historic pension scheme benefits to tidy them up and make them more straightforward, while fixing the equalisation issue at the same time. As an example, this may involve swapping a complex pension that increases at different rates over different periods for a simple flat annual pension amount.

This is in contrast to the method that had previously been seen as the frontrunner – “method C2” – which involved a complex year-by-year comparison of pension benefits, meaning the administrator would need to maintain three records for every member.

This is good news for pension scheme trustees and sponsoring employers – however the judgment does place a large burden on actuaries to set appropriate methods and assumptions to calculate the re-shaped benefits.

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