Pension Funds Insider

Pension Funds Insider brings the latest pensions news and industry insights; from investment and governance updates to new mandate appointments and pensions regulatory information.

GMP Equalisation – Tempest in a teapot?

Image for GMP Equalisation – Tempest in a teapot? pension funds

For those of you who have been living a pensions hermit’s existence these last 6 months (or just getting on with life) here is a brief recap on the Guaranteed Minimum Pensions (GMP) equalisation saga to date.

It all stems from the Barber sex equalisation case nearly 29 years ago (17 May 1990), which stated that scheme benefit accrual must be equal between the sexes from that date. However, GMPs, which form a component part of a members’ pension (for schemes contracted-out of the state earnings related top-up scheme), have always remained unequal, having in general successfully evaded efforts to sort them out. All of it was just considered too complicated and so it was easier to kick the whole issue out into the pensions long grass for years.

However, the issue is now firmly back in play, following the recent Lloyds High Court case in October 2018, which confirmed that GMPs do really need to be equalised and put forward several proposals on how this might be done. Immediate industry reactions had some commentators suggesting the potential impact on scheme liabilities could be 1% to 3% (I have even seen 1% to 4% suggested). Further, auditors then started to comment that this additional liability must now be accounted for in the latest company accounts and should be considered as an additional charge to Profit and Loss Statements (P&L). Ouch!

Consequently, this led to a worrying build up to Christmas for some, particularly those with a 2018 year-end, as we tried to digest and quantify all of this. This was a frantic time for actuaries trying to run the numbers, and a worrying one for Financial Directors on the unexpectedly large potential hit to their P&L.

However, many calculations for the increase in liabilities due to GMP equalisation are now actually coming in under 1%. Far less than those early industry estimates - a relief for many. Though, we should recognise that there are a few unfortunate schemes where this cost is much higher due to their specific design and circumstances. Further, (and one for the FDs) a charge through your P&L isn’t necessarily the only option available, as there are potential alternative accounting treatments that can be considered e.g. OCI (other comprehensive income), depending upon your historic Barber treatment and scheme’s circumstances. Certainly, worth a look.

For trustees, there are a few practical aspects to be dealt with in the shorter term (if you haven’t already) such as adjustments to current benefit quotations etc. Legal advice I have seen to date has been pragmatic and helpful here. On the liability side, if your employer already has a calculation of the impact for their accounts then this is a reasonable estimate for you to use rather than commissioning extra work. If not, they will probably need to do one soon, so it’s worth checking.

Looking forward, the GMP equalisation process still has a long way to run before it is all sorted. The Lloyds case has answered several points but there are still questions to be addressed. Input from The Department for Work and Pensions input is awaited and industry working groups are being set-up to help come to a consensus view on approaches and methodology. Further, let’s not forget that we still have GMP reconciliation (and subsequent rectification) on the go for many schemes, so all of that will need finalising and then dovetailing into the GMP equalisation work. Subsequent communication to members, many of whom may see little change to their benefits, will be challenging.

We will all therefore be here for a while longer yet. The quotation “Act in haste, repent at your leisure” has perhaps never seemed more apt!

Rhidian Williams, Partner at Quantum Advisory