Sackers' Joanna Smith sets out a helpful checklist for pension schemes to plan ahead of guaranteed minimum pension equalisation.
So far this has been a bit of a ‘start-stop’ process: while many schemes took immediate decisions on how the decision affected ongoing ‘business as usual’ administration, they have not been able to get much further given a raft of ongoing uncertainties about how to equalise in practice.
It is not too early to start sketching out an initial project plan, to help think through the various stages of the project
It is true that where schemes are able to wait for more clarity, it makes sense to do so. But we should not feel frozen in the headlights by the task ahead of us. There is a lot that we can start doing now so schemes are ready to put equalisation into action when the fog clears.
What are we waiting for?
In April 2019 the Department for Work and Pensions published its long-awaited guidance on using GMP conversion legislation to help achieve equalisation, and in July 2019 the Pension Administration Standards Association’s cross-industry working group published its “Call to Action” setting out initial guidance on rectification, data and business-as-usual transactions.
The industry is still waiting for other parts of the picture to be completed; a further Court hearing is expected (although perhaps not until 2020) addressing issues such as past transfers.
Planning your GMP equalisation project
Schemes can usefully go further, and start planning ahead:
Form a working group and identify who will undertake day-to-day project management. Have a think about the different skill-sets you might want on that group, including administration, actuarial, legal and communications.
Take stock of where you are with GMP reconciliation and rectification, deciding whether any adjustments for rectification and equalisation could best be combined for members who will be ‘in scope’ for both exercises.
Do you hold data covering the crucial period May 17 1990 to April 5 1997? Do you have annual GMP records or simply a single figure covering 1988 onwards? Does your administrator have all the data you will need or are there gaps? If there are gaps, can it realistically be obtained, or will you need to make assumptions to fill the gaps? Is there a clear understanding of how benefits earned in that period have been administered and what actuarial factors were used?
Are there any historic bulk annuity contracts or transfers-in? And, if so, where does liability for GMP equalisation sit under those arrangements?
In valuation discussions, consider what allowance should be made for GMP equalisation in light of the High Court’s judgment.
Start engaging with the sponsor about the methodology to be adopted and whether the scheme will be looking at GMP conversion.
HM Revenue & Customs’ guidance on pension tax issues and equalisation is also expected in the autumn. HMRC has said it is committed to finding a pragmatic and proportionate outcome, so this should aid the smooth implementation of GMP equalisation for all schemes.
PASA is also going to issue further guidance on data, impacted transactions, methodologies, tax and rectification projects. For those schemes interested in converting GMP into normal scheme benefits, we are also waiting for further legislative changes to ease that process.
Continuing business as usual
Schemes have already had to find ways to ensure transfers can continue. Initially these have proceeded on an unequalised basis (with appropriate member communication), but now we are increasingly seeing schemes adopt fully equalised transfer values.
In the immediate aftermath of the judgment, trivial and small pot full commutations tended to be put on hold, given concerns around unauthorised payments. Schemes are now starting to discuss full commutation on an equalised basis so they can offer those payments again.
It is not too early to start sketching out an initial project plan, to help think through the various stages of the project, the decisions that will be needed, the timeframe over which the work will take place, communication strategy and likely budgets. For now this will be a “work in progress” document to be fleshed out as we see further developments over the coming months – but a start could certainly be made on this now so that trustees are on the front foot with implementing their obligation to equalise.
Joanna Smith is an associate director at pensions law firm Sackers
