A survey of insurance companies that offer buy-ins and buy-outs, conducted by Hymans Robertson the leading independent pensions and benefits consultancy, has revealed a stark preference towards pension schemes which adopt the D2 method of Guaranteed Minimum Pension (GMP) equalisation. Responses from seven of the eight insurers active in the buy-in/buy-out market uncovered a unanimous preference for pension schemes which had opted for this conversion method. These pension schemes could also expect to receive the most competitive pricing from six of the seven insurers which responded.

Method C2, favoured by the recent High Court judgment on GMP equalisation proved to be significantly less popular with insurers. None of the insurers surveyed were currently able to administer this method and only two of these insurers expected to introduce this capability over the next five years. Pension schemes which had adopted this method could also expect to receive less competitive pricing when targeting a buy-in or buy-out transaction.

James Mullins, Head of Risk Transfer at Hymans Robertson commented:

“As many UK pension schemes are ultimately targeting a buy-in or buy-out to insure their members’ benefits, including the equalised GMPs, it is vital that scheme trustees understand how insurers will view each method and factor this into their own decision making.

“Choosing a method will be a critical decision for trustees and sponsoring employers and must not be taken lightly. Following the High Court judgment there is a risk that many schemes may simply default towards adopting method “C2” because this was the method that the High Court said did not require additional consent.  However, our analysis shows that this decision could leave pension schemes paying more to enter into a future buy-in transaction and may see them having to delay their buy-out target.

“Trustees and employers must therefore think carefully before committing large sums of money introducing an equalisation method, only to find that they need to re-evaluate at the time the pension scheme is looking to buy-in or buy-out.  Embarking on an inappropriate choice of GMP equalisation method now could cost a pension scheme millions of pounds in years to come.”

Matt Davis, Head of GMP equalisation at Hymans Robertson added:

“Pension schemes are keen to see the proposed changes to legislation that the DWP are working on to make GMP conversion under method “D2” easier to implement.   At the moment there are many hoops to jump through for GMP conversion.  With all insurers preferring method D2 it is important that there is a practical and cost effective route for schemes to implement this method.”