On 18 April 2019 the DWP published guidance setting out how GMP conversion legislation can be used to equalise GMPs.
Why GMPs create inequality in scheme benefits
GMPs exist in any scheme that was contracted out of the Additional State Pension on a salary-related basis between 6 April 1978 and 5 April 1997.
GMPs accrued in the same way as the Additional State Pension and are unequal between men and women for two reasons:
1. GMP pension ages are different: 65 for men and 60 for women.
2. GMPs accrue at different rates, intended to give the same pension at age 60 for a woman as at age 65 for a man.
This creates inequalities in overall benefits because:
1. Different revaluation rates in deferment apply to the GMP and the excess over the GMP.
2. Different pension increases in payment often apply.
3. Different late retirement uplifts apply from different dates.
Either sex can receive a higher benefit, and this may switch over time so an individual advantaged by their sex when GMPs are first paid may become disadvantaged later, or vice versa.
Why inequalities arising from GMPs need to be addressed
In the “Barber” judgement on 17 May 1990, the Court of Justice of the European Union ruled that occupational pensions were a form of pay and it was unlawful to discriminate between men and women, so that pensions had to be equal from that date onwards.
In the “Allonby” judgment on 13 January 2004, the same court ruled that inequality from GMPs must be removed, even though it arises from differences in State benefits and regardless of whether there is any opposite sex comparator in the scheme.
The Government’s view is that pension schemes must remove all inequality from GMPs for service between 17 May 1990 and 5 April 1997, although it was not clear for some time how this should be achieved.
How inequalities arising from GMPs can be addressed
On 26 October 2018,the High Court ruled that for the Lloyds Bank pension schemes:
- Benefits must be equalised to remove the effect of unequal GMPs.
- Various methods can be used to achieve this. The only one that trustees can unilaterally adopt is known as method C2, where the scheme provides the better of the male or female benefit each year, subject to accumulated offsetting. The employer could, however, choose to allow the trustees to adopt a different method.
- Conversion, known as method D2, is another lawful method to which the employer could consent. Under this method the actuary determines the more valuable of the male or female benefit and converts this into a new, non-GMP benefit of equal value.
How GMP conversion works
Existing legislation allows a scheme toconvert GMP into ordinary, non-GMP scheme benefits. This legislation has not been used by many schemes yet, but it now offers a practical way to equalise GMPs and simplify scheme benefits at the same time. GMP is often the most complex element of a member’s benefits to administer, so removing all the GMPs from a scheme will often be attractive. The process requires actuarial certification and the trustees must be comfortable that it complies with their statutory duties to members.
The post-conversion benefits:
- must be actuarially equivalent to the pre-conversion benefits,
- must not be converted to money purchase benefits,
- must include survivors’ benefits,
- must not reduce any pensions already in payment; and
- will no longer be subject to the GMP rules on revaluation and indexation.
DWP methodology – 10 stages
The DWP set out 10 stages for resolving GMP inequalities through conversion as follows.
1. Reach agreement with the employer.
2. Agree the members affected, the benefits to be converted and the form of the new benefits.
3. Set the conversion date.
4. Consult the members on the proposed approach.
5. Value each member’s benefits on a male and a female basis.
6. Equalise each member’s benefits to the higher of the male or female value.
7. Calculate the new, non-GMP benefits for each member.
8. Obtain actuarial certification.
9. Formally modify each member’s benefits.
10. Notify the members and HMRC.
Possible tax issues
The DWP guidance acknowledges some possible tax issues, especially for members who are close to the Lifetime Allowance or the Annual Allowance, or who have Lifetime Allowance protection. HMRC are considering these issues and will provide guidance in the coming months.
The process from here
Schemes need to be sure they hold the correct GMP before resolving inequalities, and HMRC are approaching the end of an exercise to reconcile their GMP data with all pension schemes. If any members’ benefits need to be corrected, trustees may wish to consider doing this at the same time as addressing inequalities. In this way members will only receive one communication and one change to their benefits.
Removing GMPs will be attractive for many schemes to simplify administration and reduce the cost of any future buy-in or buy-out. We anticipate that for many schemes this will justify the additional cost of GMP conversion over GMP equalisation alone. However, we suggest waiting for guidance on the possible tax implications before committing to this route.