GMP Equalisation

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  • 05 mins 21 secs
Judith Fish, Dalriada Professional Trustee tells us why GMP Equalisation is so important & how it might develop over the next few months.

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The Pensions Management Institute



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Mark Colegate: To discuss GMP equalisation and why it's important I'm joined now by Judith Fish, who is a professional trustee at Dalriada Trustees. Judith, thanks for joining us on PMI TV. First of all, what is GMP and why does it need to be equalised?
Judith Fish: Most pension schemes took advantage of the ability to contract out. That meant that the member and the employer paid lower national insurance and they didn't get a bit of state pension. But in return, each scheme had to provide a minimum level of pension known as the guaranteed minimum pension. This pension replicates broadly a portion of state benefits and the method, the way it's calculated is different between men and women. Back in 1990, if we go back to some time ago, there was a judgment called the Barber judgment that said pensions were pay and pay had to be equal between men and women. So, we know here we have to equalise pensions. But because of the nuances of GMPs, it impacts the way members’ benefits are paid in practice. So, for example, if you had two members who left service, a man and a woman, they both had exactly the same pension when they left. By the time they come to retirement, their pensions will be a little bit different and they'll increase slightly differently in payment. So that's the difference that we have to equalise for. Since then, we then had a judgment in 2018, the Lloyd case, which clarified that GMPs definitely need to be equalised. They also clarified how we need to equalise.
Mark Colegate: So, the GMP Equalisation Working Group has actually provided a useful blueprint on what to do next.
Judith Fish: Yes, I mean, the court case was very helpful because the judgement gave some clear guidance and then we had a working party that was set up. There's a cross industry working party. So, it included lawyers, actuaries, pension administrators, people who specialise in data, and they really looked at how the methodology works. Then it's kind of the nuts and bolts of how the methodology works. The guidance they’ve given is really helpful. It's surprisingly detailed in some areas. Obviously, it doesn't answer every question and they still recommend that you seek legal advice in a number of cases, but it's certainly a very, very good starting point, yes.
Mark Colegate: So, in the back of this are trustees, are pension schemes, getting on with GMP equalisation or not?
Judith Fish: Well, that's kind of the surprising part. You'd think we knew we had to do it. Let's face it. Most trustees knew that GMPs would have to equalise for the differences at some point. We had the court case last year, now we definitely know we have to do it and we know how we can do it. We've had the working party guidance on methodology, and that highlighted certain cases what to do in certain situations. But actually, not many schemes have actually equalised GMPs. Most trustees are still waiting; there are a couple of outstanding areas. The key one is tax, so HMRC haven't told us how members will be taxed, not only on the back payments, all the bits we have to pay them in respect of their historic benefits for pensions in payment. But also, if we have to uplift their pensions, how those that uplift are going to impact various tax allowances. So most trustees are waiting for that. I think the other thing trustees are waiting for is that the industry administrators are going to have to change their system so they can allow for all of this and there's been a lot of development going on, and I think that there is no advantage of being a first mover in this game. So, lots of trustees, are waiting a little bit to see, to make sure that all the advisers have everything lined up and that they can equalise in a cost-efficient manner.
Mark Colegate: So, if you're a trustee in this holding pattern, what should you be doing before you press the button and start equalising GMP?
Judith Fish: I think that the first thing that all trustees should be looking at is their data, and they could be doing that now. Look at your data now, because the last time members’ benefits were equal was the day they left service. So, for all our pensioners, we're going to have to go back and re-calculate all their benefits from when they left. We might have moved administrators over that period because we're talking almost 30 years ago, so we're going to have to re-create benefits and the chances are we'll be missing data. So, look now for where your data holes are. Try and recreate the benefits as best you can, work out what assumptions you might need to make and take advice.
Mark Colegate: So, what should we expect to see happening in this GMP space over the next few months?
Judith Fish: The first thing we're waiting for is HMRC guidance on the tax issues and we’re expecting that in December 2019. We also have the working group issuing further guidance on data in particular, which I think will be very helpful for trustees and finally, we've got a second Lloyd’s judgment, actually, third Lloyds judgment, due in early 2020 which will clarify the position for transfers out.
Mark Colegate: Judith Fish. Thank you.
Judith Fish: Thank you.