1 December 2016
The topic of GMP inequalities is in the news again this week, but don’t lose heart – it could be a stepping stone on the journey to being able to say good bye to GMPs forever.
To understand how we need to go back more than 25 years…
Back in early 1990s pension schemes equalised benefits between men and women. This was a result of a ruling by the European Court of Justice (ECJ) in May 1990, known as the ‘Barber’ judgement.
There was one complication. Most schemes have an obligation to pay Guaranteed Minimum Pensions (GMPs), which differ between men and women. GMPs were a consequence of being contracted out of the State pension.
The Barber judgement did not require State benefits to be equalised. It was not clear how the judgement applied to GMPs. Initially there was an expectation Government would ‘equalise’ GMPs, but it never happened.
The unequal GMPs therefore generate inequalities in scheme benefits. Most pension schemes have not removed these inequalities as it was not clear whether it needed to be done and if so how.
Around 6 years’ ago it all came back to life…
In 2010, following another ECJ ruling (Allonby) not directly related to GMPs, the Pensions Minister announced that the Government’s view was that schemes must remove the inequalities that are generated by unequal GMPs. This was followed by pensions lawyers questioning whether this was right and others asking how the inequalities could be removed.
In response, in 2012 the Government reiterated that schemes must act, published draft regulations to force the issue and issued draft guidance on how the inequalities could be removed.
The guidance was roundly criticised as the method proposed was seen as unnecessarily generous to members and costly to administer – calculating two pensions for each member (actual sex and opposite sex) and paying the greater of the two for each instalment of pension. The DWP withdrew it and in 2013 announced a working party would consider an alternative method.
‘Conversion’ offers a practical and pragmatic solution…
The alternative method is to use a little known or used mechanism to “convert” GMPs into standard scheme benefits. This involves placing a value on each member’s current complex benefits; not just their GMP, but their whole benefit, a bit like a transfer value. Each member is then given a new replacement benefit of the same value, but without the complications of containing a GMP.
The prize here is not just that GMP inequalities can be removed, as the Government insist they must. Schemes will also be able to sweep away GMPs and all the complications they entail. It might also be possible to ‘convert’ any other scheme specific underpins and oddities at the same time. The result would be significant simplification, with lower on-going costs. Future buy-ins should also be cheaper.
The news this week is that the DWP have announced that they believe this is a viable solution. It might have taken four years, but this is a significant step forward.
The method effectively involves a one-off bulk transfer value calculation exercise. Once this is done the issue of inequalities and indeed GMPs can be forgotten. Importantly the consultation also suggests that the calculation need not involve the greater of actual and opposite sex benefits for each instalment. That makes the calculations easier and means that uplifts will be less costly for sponsors than those proposed in 2012.