GMP Equalisation - What's next for your scheme?
05 Nov 2018 - Estimated reading time: 3 minutes
The long-awaited Lloyds judgment on GMP equalisation has landed and there is some clarity on what actions will be required, and possible, for trustees. Legal opinion already seems to be divided on how final this judgement will be and how clearly it will steer trustees and sponsors. But we can at least now see some of the administration implications from GMP equalisation.
Following the ruling, a range of technical solutions remain open to trustees, including exchanging GMPs for the actuarial equivalence of a pension. Each of the main options proposed by the High Court involve calculating a ‘best of’ pension for each member affected.
To achieve this schemes will have to consider the following:
- GMPs accrued after 17 May 1990 will now have to be calculated for each member on the basis of them having the opposite gender (i.e. a female having their GMP calculated as if they were male and vice versa). This would then allow the pension at retirement to be calculated again using the opposite sex GMP. The total pension may still be unchanged but the splits in pension elements will vary between the male and female calculations.
- The two pensions will then have increases applied up to date, from retirement, with a running total of pension (potentially including interest) being stored. This will most likely require records of the actual pension being calculated for each month. However it’s important to remember that not all GMPs increase at the same time as the pension and there might have been other reasons for a pension to change, such as a step up for anti-franking. This will need to be done for all pension payments since 1990. For many members this will demonstrate that they have not been disadvantaged but for some it may show that they should have received more.
- For all increases in the future, administrators will have to maintain the two separate increases in tandem, allowing for any member’s position to change in the future. That could just be to maintain an “either / or” calculation each year or that a running total for each basis also has to be maintained.
Whichever method you choose to adopt, the implementation process is unlikely to be simple and administrators may face some of the following challenges:
- For many members we simply don’t know what the correct GMP is –it’s becoming clear that in many instances trustees may have to decide between GMP calculations from HMRC that they believe are wrong or to use their own calculations.
- Administration systems don’t currently offer the opportunity to calculate GMPs on an alternate gender basis without changing data. This leaves a choice between either adopting very labour intensive processes or investing in developing new systems.
- The same is then true of pension increases. Today’s administration systems generally don’t offer running totals of pensions on different basis nor do they allow for two versions of the pension and its elements to be stored and increased. Last but not least, the quality of member data we have today is not guaranteed for members back to 1990 and may also be a factor in how easily equalisation can be achieved.
What should Trustees do next?
Firstly, I recommend waiting until we know for sure whether the judgment will be appealed. We need to at least be sure that the decision is final. Secondly, arrange to speak with your administrator about their own proposals. It’s likely that GMP reconciliation and rectification will need to be completed before the equalisation work can be undertaken and an agreement in place on how to communicate any change to members. This will help to manage expectations of when your members may expect to see the impact of this. It may also be worth speaking with your actuary as soon as possible to estimate the potential impact and inform your member communications. In reality, the actual underpayments are likely to be relatively small and for only some members of the scheme. This risks the majority of members receiving nothing extra and possibly being disappointed given the huge sums of money being quoted in the media.
In short, yes we do now have more clarity but now we’re seeing the true scale of the task ahead.
Join us for our GMP webinar on the 13th November to find out more about how this could affect your scheme. Click here to register.