Pension Transfers – GMP Equalisation

GMP is the minimum level of benefit that an individual must accrue for membership of an occupational pension scheme which was contracted out of the State Earnings Related Pension Scheme (SERPS). Many occupational schemes chose to contract out of SERPS as it offered employers and members the opportunity to pay lower levels of national insurance contributions. Members of contracted out salary related scheme (COSR) accrued GMP between 6 April 1978 and 5 April 1997 at which point COSRs were no longer legally required to provide GMP in relation to contracted out accrual.
 

Equality issues
Historically, the treatment of GMP was not equal, with GMP accruing at different rates and resulting in female members having higher GMP rates than male members. This was due to female members having a shorter amount of time to accrue GMP as GMP is payable for females at age 60 whereas for males this is age 65. Therefore, female members of Defined Benefit (DB) schemes tended to have a larger proportion of their scheme benefits made up from GMP in comparison to their male counterparts. It seemed fair at the time but subsequently fell foul of equality legislation.

The Lloyds case
Following a series of individual equality claims to Employment Tribunals, in 2016, the trustee of three pension schemes in the Lloyds Banking Group (LBG) sought clarity from the High Court on the need to equalise benefits for the effect of unequal GMPs. On 26 October 2018, following a lengthy Court case, it was announced that GMP equalisation is required in all cases. Whilst this judgement related specifically to the Lloyds scheme, it is believed that it will be used as precedent across the industry.
 

Who is affected and what is the likely impact?
The members affected by GMP equalisation are those who accrued GMP within a Defined Benefit (DB) scheme between 1990 and 1997 or those who had a Defined Contribution (DC) scheme with an underpin benefit equal to the GMP between the same period. 

It is likely that most DB schemes in the UK will be affected by GMP equalisation, as most schemes chose to contract out. Recent estimates indicate that up to 80% of all schemes will be affected in some way by GMP equalisation and the cost of resolution is likely to have an impact on scheme liabilities of between 0% to 3%. A recent survey by XPS Pensions Group suggested that the figure will be close to 1%. For most members that are affected, the impact on benefits is likely to be modest, although it could be as much as around 10% in some cases. It is not easy to generalise about whether any disadvantage will have applied to male or female members as this will be dependent upon the rules of the pension scheme, their earnings, when they retired and the period in which they were employed. However, it should be noted that the level of GMP provided will not decrease.

What are the implications for advisers?
Advisers providing transfer advice certainly need to be aware of the implications of equalisation and should consider contacting the scheme administrator or checking through the scheme details to determine whether or not GMP benefits have been equalised. 

Where equalisation has not been actioned already, advisers should be aware that at some point in the future there is likely to be a GMP recalculation exercise. This may result in some members who have already transferred out of their DB scheme being due an uplift, where the CETV offered should have been higher than it was. At this point, in order to receive these contributions, members may need to be in a plan that will facilitate top-ups, as the level of benefits payable could most likely not be a cash sum, but rather an increase to pension benefits. 

If recommending a transfer in future, advisers should consider whether and how the recommended target plan would be able to accept a further, relatively small top up.

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Our View

We have seen examples of schemes providing detail on GMP equalisation and making specific reference to the Lloyds verdict. However, given the level of complexity and time involved with recalculation exercises, it is unlikely that there will be much movement on GMP equalisation in the near future as this will clearly be a large and potentially time-consuming task for many schemes.

In addition, for most schemes there is likely to be some level cost incurred and there seems little appetite within the industry at present to drive the issue forward.

Action Required By You

  • Retain an awareness of GMP equalisation and stay up to date with developments;
  • Check scheme documentation for details of whether GMP equalisation has happened prior to any recommendation. This applies to both DB schemes and DC schemes with a GMP underpin to determine if GMP benefits have already been equalised, as some schemes have made adjustments to CETV’s to take into account the impact of equalising GMPs;
  • If the scheme documentation does not provide details of whether the client’s benefits have been equalised, we suggest that advisers contact the scheme actuaries;
  • Be aware that any client recommended a transfer from a scheme which has not equalised GMP may be subject to an uplift in the future and therefore any plan recommended should offer the facility to receive top-ups;
  • Speak with your ATEB Consultant if required;
  • If you would like to ensure your pension transfer advice processes are robust and compliant, contact ATEB. We have detailed understanding of the FCA’s thinking in this area. See here for more detail.

About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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