Could the wrong GMP equalisation method cost you millions?
01 Mar 2019
If your pension scheme’s goal is to insure your members’ benefits, including GMPs, via buy-ins or buy-outs, it’s critical to understand how insurance companies view different GMP equalisation methods and factor this into your own decision making. The wrong choice now could cost you millions of pounds when it comes to transferring your scheme to an insurer.
We surveyed each insurer in the buy-in/buy-out market to seek their views on these methods. With responses from seven out of the eight insurers active in this market, four key trends were identified:
Six out of seven insurers expect to offer their most competitive buy-in/buy-out pricing where pension schemes have equalised and then converted GMPs into non-GMPs of equal value - method D2 (GMP conversion).
More than half of the insurers expect to offer some of their least competitive buy-in/buy-out pricing where pension schemes use the method proposed by the High Court in the Lloyds Banking Group case – method C2 (cumulative equality + interest).
Of the GMP equalisation methods that the High Court said were permissible in the Lloyds Banking Group case, all of the insurance companies only have the capability of administering method D2.
None of the insurers surveyed can currently administer the GMP equalisation method proposed by the High Court in the Lloyds Banking Group case (method C2) and only two of the insurers expect to introduce this capability over the next five years.
What does this mean for you?
There is a risk that many pension schemes will default to GMP equalisation method C2 because this was the method that the High Court said did not require additional consent. It was also deemed to be the cheapest actuarial method for Lloyds Banking Group. However, our survey clearly highlights that the cheapest method to insure, by some distance, will be method D2. Trustees and sponsoring employers who expect that the end game for their pension scheme will be to buy-out with an insurance company, should therefore seriously consider the merits of implementing method D2.
Additionally, most of the insurance companies do not currently have the capability or appetite to administer method C2. Pension schemes which have adopted this method should also expect to receive less competitive pricing when targeting a buy-in or buy-out transaction in the future.
As a result, you need to think carefully before spending large sums of money introducing a GMP equalisation method. The wrong choice now could cost your pension scheme millions of pounds in years to come if you need re-evaluate at the time your pension scheme is looking to buy-in or buy-out.
We encourage you to factor-in insurance company consensus when considering how best to equalise GMPs over the coming months to get the best outcomes for your scheme and your members.