GMP equalisation ruling poses ‘significant challenge’ - industry reacts

The pensions industry has warned that the latest ruling on Guaranteed Minimum Pension (GMP) equalisation will have far-reaching implications and pose significant challenges to affected schemes and trustees.

The High Court has ruled that trustees of defined benefit (DB) schemes that provide GMPs should revisit transfers and top-up historic cash equivalent transfer values (CETVs) that were calculated on an unequalised basis if a member submits a successful claim.

It will impact DB schemes that provided GMP on benefits accrued between 17 May 1990 and 5 April 1997.

"Our analysis suggests that this judgment will mean little to no change for the majority of people who transferred out. In a typical scheme, around 75 per cent of members are not due a top-up,” said Aon partner, Tom Yorath.

“For the remaining 25 per cent, although any additional pension is typically small, a transfer value would capitalise this into a lump sum. Therefore, the top-up can range from a few pounds, to some extreme cases where the top-up could be tens of thousands of pounds.

“The challenge facing the industry is identifying those who have been affected, as in many cases schemes simply will not hold the data to know whether the member had GMPs accrued from 1990 to 1997 – let alone how much the top-up is.”

He noted that even schemes with good record-keeping will find considering data for members that transferred to another scheme potentially decades ago a difficult task, and the limited data on historic transfers will make even a ball-park estimate of the liability impact a challenge.

Lane Clark and Peacock (LCP) partner, Alasdair Mayes, added that although the judgment “isn’t a surprise”, it will “add to the burden for pension scheme trustees who already have plenty to keep them busy”.

“The immediate action is for sponsors of pension schemes to assess whether the impact is material for their upcoming year-end accounts,” he said.

“Any top-up will not be cash in hand to the member, but to their pension savings in the scheme they transferred to. Anyone who has transferred a DB pension earned after 1990 could be affected.”

Mayes noted that the process of equalising GMPs on historic transfers could take months, if not years.

Hymans Robertson head of GMP equalisation, Matt Davis, warned that revisiting transfers paid out by pension schemes over the last 30 years will be a “very significant challenge”.

“For sponsors of pension schemes who report accounting figures under IAS19, the ruling is likely to trigger a need to assess extra accounting liabilities and the impact on profit and loss,” he continued. “For those due to report as at 31 December 2020 the timing of the ruling doesn’t leave much time to analyse this.”

Trustees will be “frustrated” at having to perform a technical correction that stems from the “government’s own requirements” on GMPs, Aon partner Lynda Whitney commented.

She continued: “Trustees may reasonably know little or nothing about the members concerned and may have no way to contact them, as they believed they had discharged their liability towards them.

“Even if a top-up can be calculated - which may need to be based on calculations and conditions from up to three decades ago - there is no guarantee that the receiving scheme is still in existence, or that the member has not transferred again.

“The size of the task of equalising three decades of transfers is enormous, and many schemes will be looking for pragmatic ways to limit the scope of the exercise. Helpfully, the ruling provides some limited carve outs for bulk transfers that are done on a mirror image basis and also for some transfers that have taken place under scheme rules - this may provide a glimmer of hope for transfer clubs."

Despite the ruling posing "practical challenges", Pinsent Masons partner and GMP equalisation lead, Stephen Scholefield, said it would provide "welcome clarity" to the industry.

"The decision is far-reaching, spanning wider than just GMP equalisation and potentially affecting rectification projects in general.

"It seems clear that the judge has left a number of areas open in order to give trustees some flexibility given the time, data and administrative challenges."

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