Geraldine Brassett, Key Account Manager, Pensions Administration Support, at Capita, outlines three actions you can take now to prepare your pension scheme for GMP equalisation.
It’s now been two years since the High Court ruled that all schemes with Guaranteed Minimum Pension (GMP) in the UK must equalise benefits for men and women.
Since then, the pensions industry has been grappling with the question of how to implement the complex process of equalising for the effect of unequal GMPs (as you unfortunately can’t equalise the GMPs themselves) – each scheme is unique, requiring analysis from trustees, sponsors, administrators, actuaries and legal advisers.
There is still some uncertainty about GMP equalisation – the Government hasn’t been prescriptive about how to achieve it and there are still some potential tax issues for schemes, especially those considering converting their GMPs. However, despite the unanswered questions, there are still a lot of practical things that sponsors and trustees should do now to make sure that their pension schemes are in the best possible position to start equalising when the time comes.
Actuary Heather Buttle, a GMP equalisation expert in Capita’s pensions and employee benefits team, and I set out some of the most important of these practical steps, and explained how you can take them for your own pension scheme, during a recent webinar.
At Capita, we understand the challenges that schemes are facing. We’ve got more than a decade’s experience of GMP equalisation, and our specialist team has already supported more than 100 schemes through the process. Based on our extensive experience, we’re approaching GMP equalisation from two directions. The first looks to equalise past benefits paid to both men and women. The second looks to make any necessary changes to provide equal benefits to pension scheme members in the future.
Here are three key things that you can do now, to make your own GMP equalisation journey successful.
1. Get ready to equalise
It’s never too early to start preparing for GMP equalisation! Some schemes may be further along the process than others (starting with GMP reconciliation, then moving on to GMP rectification, and ending with GMP equalisation and possibly GMP conversion too) but, no matter what stage you’re at, now’s the time to start discussing your scheme’s requirements with your advisers, getting your data into the right shape, and deciding which approach to take.
The key is to make sure that you don’t run into foreseeable difficulties when you come to start your equalisation work that delay the project unnecessarily.
So, when you’re putting together a plan for GMP equalisation, it’s important to consider the following:
- What dependencies or other plans for your scheme you may have and factor them into your timetable. Inevitably, decision making ends up being an iterative process and you may need to find additional data to respond to questions that may come up during discussions with your scheme sponsor, advisers and other interested parties. So, allowing enough time for open conversations at an early stage is crucial and, with this in mind, we have developed a GMP equalisation checklist that will take you through and support you in this exercise from start to finish.
- The data required for your approach and how you will make sure it’s correct. After all, if it’s incorrect or even incomplete, it’s likely to show in the provisional results, and then you’ll have to duplicate your effort to resolve it.
The exact data required for a GMP equalisation exercise will depend upon the approach that you, with specialist advice, decide is best for your scheme and its characteristics. However, the data sets for GMP equalisation and conversion are very similar and there’s a lot of overlap with GMP rectification. If you haven’t reviewed data quality for GMP rectification yet, it may be more cost-effective to run reports across a wider population and covering more data fields so that you meet the requirements of all these exercises.
- The impact your choice of methodology will have on individual calculations, such as deferred to retirement. With GMP conversion, the shape of the converted benefit will affect the work involved. For example, will the converted benefit look and behave like a GMP and just be called something else or will it form a completely new tranche of pension?
2. Communicate with members
Your communication strategy will be specific to your scheme.
Our experience has shown that most members are unaware of GMP equalisation: across the schemes that we look after, our member helplines have received very few calls asking us about this and what it means for members. This is due in large part to schemes recognising that the majority of their members will see only a small benefit from equalisation, if any, and taking a low-key approach to communicating with their members about it as a result.
You’ll need to consider who you want to communicate with and when as part of your planning for equalisation. You’re likely to need a suite of letters to reflect scheme members’ individual circumstances and status (pensioners, deferreds, actives and dependants), different categories, with different letters for different methodologies and so on. If you use conversion, you need to factor in consultation letters at an appropriate time. You should also consider how best to manage members’ enquiries and potential complaints post-implementation, once they have seen the uplift their pension has received and any arrears due to them.
3. Decide whether conversion is the answer
I’ve heard lots of people say, “Well, if we adopt conversion, everything will be simpler.” While that certainly could be true once implementation is complete, moving to conversion could actually create more work for you up front, depending on the decisions that you make.
If you remove GMPs then, in theory, you also remove all the restrictions relating to GMPs, such as restrictions on taking an early retirement pension, restrictions on the amount of pension commencement lump sum and so on. This will be influenced by your scheme’s rules and your trustees’ decisions.
One of the early tasks in your project will be to complete an impact analysis, to examine what needs to change, whether it be an automated or manual calculation, letter or process, and whether there are any time dependencies.
This is because, to equalise your pension scheme’s benefits successfully, you must implement the necessary changes to ongoing service delivery such as annual pension increases, and it’s important that you plan both phases of the implementation project to ensure that they don’t affect the service that your members receive.
The level of ambiguity surrounding GMP equalisation means that the sooner you start getting ready for it, the better. If you don’t, you run a very real risk of encountering issues that put your scheme at the back of the queue when it’s time to complete this complex exercise.
This isn’t good for your scheme or its members. What is good for them is acting quickly and decisively to lay the groundwork as soon as you can.