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GMP equalisation for small schemes: When “it depends” becomes “you don’t need to worry about that”

GMP equalisation for small schemes: When “it depends” becomes “you don’t need to worry about that”

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Speaking from experience, when you pay a lot of money for professional advice and the answer that you receive is “it depends,” it can understandably be rather frustrating.  This is often the reality of the matter, with so many complicating factors that can sometimes become worse when they interact with each other.  GMP equalisation is no exception, but we shouldn’t always accept this as the only possible answer.  Giving some thought to the specific details of the scheme in question may well change the answer to “you don’t need to worry about that.”

It’s a bit like buying a new car – this can be terribly complicated, especially if you’re not familiar with all the technological advances that come with them these days.  However, taking some time to assess your specific needs before you walk into a showroom will save you time and hassle, and could prevent you from being bamboozled by needless technical jargon and paying extra for features that you’ll never use.

When it comes to GMP equalisation, there are several factors that have the potential to make the process rather complex.  However, these don’t necessarily apply to all pension schemes.  Smaller schemes – that is, those with a small number of members who are in scope for GMP equalisation – may be able to discard some of these complexities if the membership looks a bit like this:

  • Most, or all members retired at their normal retirement age
  • Nobody left or retired from active service after the age of 60 (so, no need to consider Later Earnings Addition uplifts)
  • No historic transfers in or out of the scheme
  • No pension sharing orders
  • Most, if not all, members being of the same gender

Combined with certain benefit structures, such as fixed pension increases in payment, or GMP and non-GMP receiving increases at the same date every year, may mean that GMP equalisation is better approached with something a lot more pragmatic, which would achieve the same ends while minimising unnecessary costs.

Instead of diving straight into using a complicated calculation engine (or, say, buying that car with all the modern features), GMP equalisation for a small scheme may instead be best approached with logical reasoning, even when some of the data items are unreliable or missing.

An outcome such as “the male pension will always be higher than the female pension” doesn’t necessarily need detailed calculations to be determined, though an understanding of how the calculations would operate is needed to be assured of that.  This particular outcome would mean that there would be no past or future ‘crossovers’ between a male and female pension, doing away with the need to hold dual records.  Member communications could be significantly simplified if, for example, there would be no need to explain things like what a ‘carrying credit’ is.

A potential outcome like this would be very appealing for a small scheme, with a simple administration system and a limited budget.  If such a scheme is looking to achieve a buyout in the near future, combining the GMP equalisation with a conversion of minimum interference (that is, to simply re-label the ‘better-off’ GMP as no longer being GMP but retaining the same characteristics), could help pave the way for that buyout with minimal fuss.

So how do we get there?  And how do we define such a ‘small’ pension scheme?

‘Small’ is a bit of a misnomer here; what we really mean is a scheme with a very small number of different groups of members, which have only a few of the features that make GMP equalisation complicated.  By contrast, a pension scheme with ten in-scope members, all of whom have their own unique quirks, will likely need detailed calculations for every single member.  So, eye-balling the available member data is an essential first step.

Then, the pension scheme benefit structure, in combination with the features of the in-scope population, needs some interrogation.  Certain complex aspects of benefits can be disregarded entirely if they don’t apply to the members being equalised, simplifying the whole process.

Not all pension schemes will be so lucky, but it’s worth exploring this as the first step on your GMP equalisation journey, before getting that expensive advice and preparing all the data that may be required.

If a simple solution can be achieved, or a simple but reliable car can do exactly the job that you need, then the cost of the whole exercise can be reduced to levels that are more acceptable.  Many of the complex matters which have trustees and their advisers scratching their heads can be put to bed with a reassuring “you don’t need to worry about that.”