Insurers favour D2 method for GMP equalisation

Pension schemes should adopt the D2 method for guaranteed minimum pensions (GMP) equalisation in order to get favourable buy in and buyout pricing, research has found.

A survey, conducted by consultancy firm Hymans Robertson, found that seven out of eight insurers had a “unanimous” preference for pension schemes who opted for the D2 method, with six out of seven offering more competitive pricing to schemes who had used the method.

This is contrary to the High Court judgment on GMP, which favoured method C2, despite no insurers having capability to administer this method, and only two planning to introduce it over the next five years.

Commenting, Hymans Robertson head of risk, James Mullins, said: “As many UK pension schemes are ultimately targeting a buy-in or buy-out to insure their members’ benefits, including the equalised GMPs, it is vital that scheme trustees understand how insurers will view each method and factor this into their own decision making.

“Following the High Court judgment there is a risk that many schemes may simply default towards adopting method “C2” because this was the method that the High Court said did not require additional consent.

“However, our analysis shows that this decision could leave pension schemes paying more to enter into a future buy-in transaction and may see them having to delay their buyout target.”

According to research from Aon, 50 per cent of schemes favoured the D2 method, while 39 per cent favoured method C, the dual record approach.

Hymans Robertson head of GMP equalisation, Matt Davis, said the Department of Work and Pensions are working on making it easier to implement method D2.

WTW managing director Rash Bhabra also believes that using the D2 method would make them easier to hedge and less expensive to pass onto an insurer.

“More straightforward benefit structures are easier to communicate to members and can provide members with more flexibility. GMPs have historically placed restrictions on options such as early retirement, tax-free cash and turning a small pension into a lump sum,” he added.

“Telling members about conversion also provides an opportunity to explain existing options, such as their ability to take a transfer value."

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