7 December 2020
When the new GMP judgment came out on 20 November, reactions like “eeeaaaargh!” were common among our clients, both trustees and corporates.
The challenges of paying GMP equalisation top-ups for cash equivalent transfer values paid out over the last 30 years (yes, 30 years; that’s before many of my colleagues were born!) are enormous. And there’s an urgent aspect to this for plan sponsors: you need to pre-book the costs in your year-end accounting figures!
You won’t be able to use common sense to ignore this, as auditors are expecting you to make a serious effort to estimate the liability using the best data you can get your hands on. And the lack of time before year-end is not an excuse. And what’s worse is that it’s looking very likely that the auditors will view this as a hit to profits (as it was in 2018 following the original judgment).
We discussed this along with several other year-end planning issues in our October report, Shifting Sands. Here’s our 3-step plan to minimise the pain of this wholly unwelcome new requirement:
- Get hold of as many historical scheme accounts as you can back to 1990. Transfer values paid out are a quick and easy item to identify. Add these amounts up plus interest at 1% above the Bank rate.
- Assume that equalisation uplifts on those historical transfers would be the same proportion as the uplift you applied to your balance sheet following the initial judgment in 2018.
- Compare the resulting high-level liability estimate with your materiality threshold: this will usually be the “audit misstatement posting threshold” (AMPT) used for reporting to your audit committee. Remember the AMPT could in some cases be different for different sets of accounts (e.g Group accounts and local statutory accounts).
My experience so far across a range of different LCP clients is that 85% are below the AMPT threshold. In those cases there should be no need to make any allowance in the year-end accounting figures. This can be a surprisingly easy exercise to carry out, and is often sufficient for auditors to agree to.
If you’re in the less fortunate 15% then here are some ideas to help you and your auditor avoid going down an unnecessary, costly and slippery rabbit hole:
- The initial estimate may have been based on an incomplete set of scheme accounts, perhaps only the last 10 years or so, with an extrapolation back to 1990. Make simple adjustments to correct for the fact that pro-rating for missing data will often be overly prudent, for example:
- The “freedom and choice” changes in 2015 mean that transfer activity was generally much less common in the past compared to more recent history.
- Any enhanced transfer values (perhaps as part of an exercise) probably cover any GMP uplift so it may be possible to exclude them from this assessment.
- The change to deferred indexation in 2011, from RPI to CPI, will often mean that uplift percentages are lower before that date.
- There can be relatively little 1990 to 1997 service in early transfer amounts and so smaller proportional uplifts should apply.
- Trustees have to make real-world decisions and may decide not to send monies in respect of every identified case. They may decide for example to apply a pragmatic threshold to minimise administration costs; and there may be insurmountable data obstacles (e.g. due to a change in administrator or other reasons for non-existent records). A scheme-specific assumption on the percentage of the theoretical liability that is likely to be paid out in practice will in many cases significantly reduce the company’s accounting best estimate relative to the initial estimates outlined above.
In summary, there are easy ways to reduce the management time, consultant spend, auditor challenge and balance sheet / P&L pain: as long as you start now!