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Sticky Notes

GMP equalisation is simply a wake-up call for creativity

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The need to equalise Guaranteed Minimum Pensions (GMPs) between male and female members of defined benefit pension schemes has simmered in the background of the pensions world ever since the Barber judgement in 1990. The industry has effectively spent my whole life burying its head in the sand over the issue. This is not a criticism of the industry; more so an illustration of the complexity and number of unknowns surrounding how exactly GMPs should be equalised.

Some of those unknowns were answered last October with a High Court judgement, which clarified which approaches could be used to equalise GMPs. It was like seeing a dormant volcano suddenly burst into action, as pension professionals throughout the industry grappled with the detail and sought to establish the best path forward.

But through all the frenzy and complex unpicking of historical benefits, there are a number of opportunities which trustees and scheme sponsors should be aware of.

Risk and cost reduction

Many defined benefit schemes are now on the gradual journey of risk reduction, with the aim of eventually being self-sufficient or fully bought out with an insurance company. GMP equalisation brings many opportunities to progress this journey further.

Firstly, through the equalisation of transfer values: GMP equalisation will create a significant administrative burden, particularly if the method commonly known as ‘C2’ is chosen (whereby the scheme may have to set up three administration records for each member). Running a transfer value exercise, where non-pensioner members are offered the option to take their benefits out of the scheme (and where a suitable uplift for GMP equalisation is included within the transfer value), could remove this burden for those who transfer out, and save money on the future ongoing costs of running the scheme. Furthermore, it would be expected that having members transfer out would improve the scheme’s funding position on technical provisions, self-sufficiency and buy-out measures.

In addition, if a scheme decides to use the other industry-favoured method of GMP equalisation, ‘D2’ (under which increasing GMP benefits are converted into a non-increasing non-GMP benefit), there could be implementation efficiencies gained from offering members a Pension Increase Exchange at the same time. Pension Increase Exchanges (or ‘PIEs’ as they are commonly known) involve a similar process of awarding a non-increasing (higher) pension in return for forgoing an increasing (lower) pension – generally on the non-GMP accrued before 1997. PIEs not only reduce inflation risk in a scheme, but also make it cheaper to buy the benefits out with an insurer later down the line.

Finally, GMP equalisation will need to be communicated to members. This brings the perfect opportunity to highlight the other options open to defined benefit members. Communications could remind members of their benefits, remind them of their right to transfer out of the scheme, or even provide them with a transfer value demonstrating their new equalised benefits (along with a PIE option, if relevant).

When considering the detailed legal and actuarial advice surrounding GMP equalisation, and making decisions on which approach(s) to use, trustees and sponsors should see past the confusion and complexities, and instead look for the opportunities that the situation brings. Getting this right could help, rather than hinder, their long-term journey plan.

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