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New Buck survey on GMP equalisation impact

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So how big a financial issue is this GMP Equalisation thing? Is it a massive windfall for members and a hammer-blow to pension scheme finances?  Or is it totally negligible, almost not worth bothering about?

The answer is somewhere in the middle, according to a new Buck survey.

Hard to generalise

The survey – which covers defined benefit schemes up to around £1bn in asset size that are going through the “Square” process – shows that the estimated impacts on liability values range from around 0.01% to nearly 5%. This variability is large, driven by differing benefit structures, membership characteristics, and the period of time over which members have built up benefits.

It is complex and hence hard to generalise. However – as an example of an exception – a scheme which closed back in the early 2000s, which has a high proportion of male members, and provides minimal levels of increases to pensions after retirement, may see a relatively high liability impact.

Conversely, a scheme that is still open to new benefits, which has a high proportion of female members, and provides generous increases to pensions after retirement may see a relatively low liability impact.

The average impact on liability values across the survey is 0.8%, with half of pension schemes having an impact between 0.25% and 1.5%. This is not exactly a game changer for scheme finances but is nevertheless not something that can or should be ignored. Therefore it is important for an allowance to be built into all funding assessments, including valuations, annual reports and regular updates.

Pragmatic approach

So do schemes and sponsoring employers just need to accept this liability increase? Or are there actions they can take to limit the damage or even offset it entirely? In short, yes there are.

First, by ensuring the process is run smoothly. By taking a robust, but pragmatic, approach to the key complexities, it is possible to limit the impact on short-term costs.

But schemes can go further than this, in particular if they use the “GMP conversion” method – also known as method “D2” (or as my son thought he heard me say the other day, method “R2D2”!).

GMP conversion involves switching complex GMP benefits for a simplified structure. Why not combine this with a “Pension Increase Exchange” exercise to offer members the option to simplify more of their pension. These exercises are popular with members, as they give the member a higher starting pension, but also provide a liability-value saving for the scheme. Typically this saving could be around 1% – enough to more than offset the estimated impact of GMP equalisation for a typical scheme (from Buck’s survey).

Simplify benefits

Simplifying the benefits also provides an improvement in insurance pricing for “buy in” or “buy out” deals. In some cases this could offset the raw impact of GMP equalisation, potentially leaving the scheme in an improved financial position over the long term.

So GMP equalisation could actually lead to a positive outcome for a scheme’s finances.

A final word of caution though: The complexity and impact of GMP equalisation will turn on finer details of scheme data, benefits, practices and rules. Without strong advice it won’t be easy to navigate through this process and maximise the potential benefits – unless, perhaps, you enlist the help of R2D2!

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