Up to £50bn of buy-ins may need restructure after GMP ruling

The recent High Court judgement on GMP equalisation could mean that up to £50bn of buy-ins may need to be “restructured”, Aon has suggested.

The firm said there is likely to be a “flood of requests” to insurers from schemes who have previously implemented bulk annuity policies, but that many deals would have implemented a “future proofing” structure for such a scenario.

Last month, Mr Justice Morgan ruled that Lloyds must start the process of equalising the benefits in relation to the GMP, which could cost the bank up to £150m, while the industry is still working out the total cost of the ruling.

Aon partner, Mike Edwards, said: “Over £50bn of buy-ins exist in the market with only a minority expected to relate to schemes that have already equalised GMPs.

“Helpfully, the bulk annuity market has done a good job of anticipating an eventuality such as the Lloyds ruling with ‘future proofing’ contractual provisions typically included. These enable schemes to restructure insured benefits to reflect things like GMP equalisation.”

Despite this, Edwards suggested that the range of methods that schemes will use to calculate the impact has the potential to be a “huge problem” for insurers.

Furthermore, the ruling comes at a time when insurers are seeing record demand for buy-ins and buyouts, with records expected to be broken this year and next year.

“However, the market has shown itself to be resilient to legislative shocks time and time again and it’s clear from our discussions so far with insurers, that the market is very keen to develop solutions that meet the needs of all parties, including the members that ultimately receive a pension,” Edwards added.

Aon also warned that schemes need to be careful when selecting their method of GMP equalisation, as it could potentially be incompatible with what can be insured in the future.

“Any equalisation method that introduces overly burdensome administration is likely to be unwelcome to most buy-in and buyout providers. As such, schemes should be alert to the fact that it’s likely that there will be an obvious preference for standardisation and simplification from insurers on this issue,” Aon partner John Baines said.

Baines added that it shouldn’t put schemes off pursuing a buy-in or buyout, but that schemes should remain flexible in order to achieve attractive pricing.

A number of large defined benefit schemes have already started assessing the impact of the ruling.

According to their financial results published last week, AstraZeneca, Sainsbury’s, National Grid and Wincanton are already assessing how the ruling might affect their pension schemes.

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