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New DWP Guidance tackles GMP equalisation | Speedread

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:

  • a high-level overview of the DWP Guidance; and
  • key action points for employers and trustees.

You can also read our summary of the background to the Lloyds Bank judgment and GMP equalisation from October . 

No one size fits all

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.

GMP conversion: how to do it

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:

  1. Agreement by trustees and employer(s) on the conversion method;
  2. Select members for conversion and agree which benefits will be converted and the form of new benefits;
  3. Set the conversion date;
  4. Consult with members pre-conversion;
  5. Value liabilities;
  6. Adjust and equalise benefits'
  7. Conversion and determine post-conversion benefits;
  8. Certification of actuarial equivalence;
  9. Modification of scheme to effect the conversion; and
  10. Issue post-conversion notifications

Pros and cons of conversion

Advantages of conversion:

  • one-off exercise;
  • simplifies future administration;
  • reduces future costs; and
  • favoured by insurers.

Disadvantages of conversion:

  • may not always be in members' best interests;
  • may materially alter the shape of scheme benefits (e.g. higher/lower starting pensions but with lower/higher increases in retirement);
  • employer consent to conversion is required (whereas employers can compel trustees to equalise using the C2 method);
  • possible tax charges for certain members; and
  • members and/or unions may object so potential legal risk.

Tax issues

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:

  • lifetime allowance (and other protections);
  • annual allowance;
  • lump sum payments; and
  • transfers.

 

What about transfers?

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.

What action should trustees and employers take now?

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).

Next steps

To ensure trustees and employers are ready to proceed with GMP equalisation, when there is more clarity, the immediate next steps will be to:

  • obtain legal and actuarial analysis of their scheme's position;
  • ensure GMP records are accurate and ready for equalisation, having dealt with any outstanding GMP reconciliation issues;
  • have an open dialogue between trustees and employers; and
  • have training at your next trustee meeting to keep up to date on GMP developments.

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

 

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