PASA launches GMP conversion guidance

Unlike other approaches for equalising GMPs, conversion enables trustees to disapply statutory instruments regarding GMPs for some or all of the members in their scheme, subject to certain conditions, for the purposes of removing the inequality that can emerge between men and women.

The PASA guidance is designed to support the 30 per cent that are using conversion on its own, and although it will be useful it does not directly cover all the issues that will be faced by the 20 per cent using conversion and PIE

Lynda Whitney, Aon

The guidance lists five conditions that must be met: the post-conversion benefits must be at least actuarially equivalent to pre-conversion benefits, pensions in payment must not reduce, members must not be switching to defined contribution benefits, there must be minimum contingent survivor benefits, and certain procedural requirements must be met.

These include employer consent, member consultation, member notification and HM Revenue & Customs notification.

GMP equality

GMP equality is defined as “making sure a member with a GMP relating to contracted-out pensionable service during the period May 17 1990 to April 5 1997 receives benefits that are not less than those which would have been provided had the member been of the opposite sex during this period”.

Though GMP equality is the ultimate aim, the guidance acknowledges a list of ancillary benefits of conversion. 

These include reducing or avoiding increases in administration costs, reducing administration complexity, simplifying benefits to aid member understanding and communication, modifying benefits to make them easier to hedge, reducing the cost of buyout with an insurer, and “removing certain restrictions on members’ options”, the guidance states.

Schemes likely to find conversion attractive include those with complex benefits, smaller schemes looking to buy out, schemes with a significant number of low earners, schemes with in-house administration, those “which already have an at-retirement pension increase exchange option, a bridging pension option, or are seeking to introduce them”; and those “where the additional complexity of operating the year-by-year approaches on an ongoing basis would be particularly onerous”.

Where the aim is solely to achieve GMP equality, it suggests that the affected membership is likely to be constrained to cover only those who accrued a GMP between May 17 1990 and April 5 1997, and the dependents of such members.

Where trustees have wider objectives, it is likely they will want to include all those with a GMP, the guidance explains.

The guidance also covers some of the tax implications to be considered by those opting for GMP conversion. Pensions Expert has reported previously on industry concerns that HMRC has yet to properly explain how conversion interacts with pensions taxation.

It also sets out three scenarios and explores the ways in which GMP conversion is or can be used in each: a bulk exercise in retirement for pensioners over the age of 65 and under 60, an exercise at retirement covering both normal and late retirement, and a bulk exercise in deferment covering members deferred at ages 58 and 45.

Alasdair Mayes, chair of PASA’s conversion sub-group responsible for preparing the guidance, pointed to a recent survey by the Association of Consulting Actuaries showing that 43 per cent of respondents were likely or very likely to use GMP conversion, compared with 31 per cent who preferred a year-by-year approach. The remaining 26 per cent were undecided.

“GMP equalisation is a major undertaking. The conversion guidance addresses another significant step, enabling trustees and their advisers to better navigate their equalisation journey,” Mayes said.

“GMP conversion is a valuable tool that can be used to equalise benefits for GMPs and avoid the additional complexity associated with the year-on-year equalisation methods.

“Lots of schemes are keen to use GMP conversion but are aware they need to consider the impact on members and address pensions tax and procedural issues from current legislation. This guidance and the examples provided will help them achieve this.”

Guidance useful but not exhaustive

Industry figures broadly welcomed the guidance. David Fairs, executive director for regulatory policy, analysis and advice at the Pensions Regulator, said it constituted “a valuable addition to the portfolio of guidance” published by PASA’s working group dealing with what is “a hugely complex area”.

“This guidance will help trustees understand which approaches are being taken in industry to deliver conversion, and the factors they need to consider,” he said.

Anthony Arter, the pensions ombudsman, added that the guidance “will be useful for us to refer to in our investigations and will be beneficial for the pensions industry working on these types of cases”.

Matt Davis, head of GMP equalisation at Hymans Robertson, said that though “a range of equalisation options will be used across the industry”, it is expected that GMP conversion “will be suitable for a significant proportion of schemes and this guidance will help schemes navigate a suitable path through these projects”.

The guidance was not exhaustive, however. Aon partner Lynda Whitney pointed to research, published by Aon, showing that half of the 120 schemes it covered that have made a decision in principle have opted to use conversion, with 30 per cent using conversion “on its own” and 20 per cent using it in combination “with a pension increase exchange”.

“The PASA guidance is designed to support the 30 per cent that are using conversion on its own, and although it will be useful it does not directly cover all the issues that will be faced by the 20 per cent using conversion and PIE,” she said.

“There are also some areas in the PASA guidance that are particularly complex because of the interaction of pensions taxation and the conversion legislation. Simpler approaches could be possible if we saw changes in the law.” 

These could “ensure that the conversion legislation better reflected the option of conversion at retirement. For example, by not requiring the actuary to certify each case, but allowing them to advise on a process”, Whitney continued.

They could also “ensure the tax law was clearer regarding conversion for GMP equalisation not triggering loss of protections. This could enable simpler processes immediately before retirement, rather than the complex mix of immediately before and immediately after retirement for different members as illustrated in this PASA guidance,” she suggested.

“Overall, the PASA guidance is extremely helpful in giving examples of GMP conversion that can be followed. But this guidance is not intended to be an exhaustive list and other approaches could be equally acceptable.”