The DWP has recently issued new Guidance to help pension trustees and employers navigate the complexities of equalising Guaranteed Minimum Pensions, known as GMPs.
This follows the Lloyds Bank judgment in October 2018.
This briefing provides:
You can also read our summary of the background to the Lloyds Bank judgment and GMP equalisation from October .
The Guidance sets out how schemes may use existing statutory conversion provisions, if they decide to convert GMPs into non-GMP benefits. The conversion route (known as D2) was one of a number of available methods to equalise GMP benefits in the Lloyds Bank judgment. However, the Guidance is clear that the Trustees should take legal and actuarial advice to determine which method would be most suitable for their scheme.
The Guidance is most relevant for schemes in the process of a buy-in or winding up, who are considering converting GMP benefits. The Guidance outlines the methodology for GMP conversion, with a ten stage process:
Advantages of conversion:
Disadvantages of conversion:
The Guidance acknowledges that tax issues will arise on GMP equalisation, regardless of the method used. HMRC is currently considering the impact of GMP equalisation on:
This is not covered in the Guidance. Trustees are currently in a difficult position where a member with an entitlement to GMP requests a statutory transfer. Many trustees and their administrators are making a transfer with no adjustment for GMP equalisation, with a top-up payment to follow once equalisation has been completed. Others are making a "best estimate" adjustment and transfer-out on a full and final basis. Whilst these options appear to be those most commonly used by trustees at the moment, neither comes without complexity nor risk of challenge.
A further High Court hearing in relation to the Lloyds Bank schemes may provide clarity on transfers. However, in the short-term uncertainty will continue on how schemes should deal with transfer requests and whether past transfers-out will need to be revisited. Schemes will need to continue to work with their advisers to implement interim arrangements to deal with member transfer requests.
The Guidance is helpful but further clarity is required with revised legislation and/or further court judgments and guidance from HMRC. Most schemes would be advised to wait to equalise GMPs unless there is an urgent need for them to do so (e.g. to conclude an insurance transaction or to effect the winding-up of a scheme).
To ensure trustees and employers are ready to proceed with GMP equalisation, when there is more clarity, the immediate next steps will be to:
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions