Response to the Government’s consultation on GMP equalisation
30 Nov 2016
Jon Hatchett, Head of Corporate Consulting, said:
“The Government has confirmed its longstanding belief that schemes ought to adjust their pensions to compensate for disparities in Guaranteed Minimum Pension (GMP) for men and women, and is consulting on a proposed methodology for doing this.
“Given that legislation makes GMP inherently unequal between the sexes, this is pretty tricky. Compounding that, schemes will need to look back to member data from 25 years ago, when microfiche was all the rage.
“The cost to industry of pressing ahead with this will be disproportionate to the potential gains made by scheme members. The real winners will be the advisory community and administrators, who will need to help schemes navigate the complexity that equalisation brings.
“The timing of this consultation is unfortunate for a number of reasons. First, it will add tens of billions to the liabilities of UK defined benefit (DB) schemes at a time when deficits have reached record highs. This will pile yet more pressure on schemes and the companies sponsoring them. We’re likely to see an uptick in liability management exercises, as schemes explore all options to settle benefits and lessen the cost and hassle of dealing with this.
“Second, one of the core building blocks that will enable equalisation to take place is GMP reconciliation. The Government is already creaking under the weight of queries. There is currently an eight month backlog to process GMP data at HMRC, and it’s getting worse not better. This is already going to increase administration costs for trustees. Arguably the priority for Government should be resolving this.
“Another issue is the uncertainty around Brexit. GMP equalisation is a product of EU law and the parliamentary Brexit backlog means it could take years for any legislation to pass.”
Discussing what schemes can and should do now, he added:
“Even though legislation is likely to be several years off, the threat of this will loom large for schemes. There are sensible actions that they can take now to prepare for this, most notably data cleansing exercises. While these come with a price tag, they will put schemes in the best possible position to tackle this exercise when it comes. Given the cost of providing DB benefits has now reached 50% of pay, sponsors are already shining the spotlight on costs. I’m not sure why the DWP can’t let sleeping dogs lie. Surely there are bigger priorities facing the country right now?