Complexity and cost of GMP equalisation concerns employers

Employers are concerned about the complexity and cost associated with the equalisation of guaranteed minimum pensions (GMPs), according to the Association of Consulting Actuaries (ACA).

A survey conducted by the ACA over the summer with 308 employers has revealed that administrative complexity and time is the number one worry for companies when looking at GMP equalisation, with many employers admitting that they remain undecided on how they should respond to the ruling.

The cost of carrying out equalisation is the second most common concern among employers, with an increase in liabilities and tax complications also troubling many pension managers and trustees.

Commenting on the study, ACA chair, Jenny Condron said that it was surprising that employers saw missing and poor data as one of the less significant challenges in addressing GMP equalisation.

He said that the ACA believes that many schemes will need to focus resources on their data as a first step in addressing the issue — including completing long-running GMP reconciliation exercises.

The ACA’s study also found that 64 per cent of surveyed employers who run DB schemes, believe that it will take more than two years to fully equalise pensions, while 43 per cent say they are likely to opt for the so-called method D2 and 31 per cent lean towards the year-on-year calculations and dual records approach of “method C”.

The other 26 per cent are undecided over which approach is best for them.

According to Condron, many of the latter group are waiting to see the outcome of next year’s court case to address residual uncertainties around GMP equalisation.

“Whilst we are not surprised more employers and trustees are leaning towards the D2 conversion method, perhaps on the basis that ongoing administration will be similar to the status quo, and there is the opportunity to simplify benefit terms too, it’s perhaps surprising that close to a third are favouring method C, the dual records approach,” said Condron.

“It is to be hoped that this doesn’t reflect a default decision based simply upon the High Court judgement, which favoured method C2.

"The approaches to be used by employers and trustees need to reflect each scheme’s particular circumstances and an understanding of the short and long term practical and cost implications.”

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