Guidance on GMP equalisation methodology published

The guidance, developed over the past nine months by a group of pension professionals, said schemes will need to decide on the year-by-year method to be used to correct past underpayments, and to seek employer consent for GMP conversion where a historic scheme sponsor no longer exists, in order to successfully adjust benefits and achieve GMP equality.

It suggested practical ways to manage some of the inherent challenges, and that a number of factors – including the impact of equalisation on scheme liabilities, the number of members affected, administration costs and the ease of member communication – should all be considered in the decision.

Importantly, the paper stated “there is no ‘one-size-fits-all’ approach” and “each scheme will need to consider and decide which approach best suits its needs”.

The issue of GMP equalisation remains a hotly debated topic among trustees, sponsors and advisers, following last year’s landmark ruling in the Lloyds Banking Group case.

While the court approved a number of methods to achieve GMP equality, technical issues remained.  

Duncan Buchanan, chair of the sub-group responsible for preparing the guidance, commented: “These issues are unlikely to be subject to judicial consideration but need to be addressed by schemes implementing GMP equality. 

“For most members, any changes to benefits will be modest and not all members will need an adjustment.”

He continued: “This guidance note puts forward ‘good practice’ suggestions as to how schemes may achieve GMP equality.”

Mark Williams, principal and London retirement practice leader at Buck, said: “Today’s methodology guidance is a positive move towards making sure pension schemes are taking the steps they need to fully understand the complexities of the different methods of equalising GMP benefits.”

Alasdair Mayes, partner at Lane Clark & Peacock, also commented: “The political position in parliament changes from day to day, but I really hope that measures to streamline GMP conversion are included in the pensions bill this autumn.  

“I know the HM Revenue & Customs have also been working hard on the pensions tax implications. It would be very helpful if they could provide reassurance that equalising benefits will not have unreasonable tax consequences on members, nor create disproportionate administration for schemes.”

Anthony Arter, the Pensions Ombudsman, added that the guidance will be “a useful reference for us when reviewing complaint cases”.

Today’s guidance follows the Department for Work and Pensions’ guidance on using GMP conversion legislation to help achieve equalisation published in April, and the Pension Administration Standards Association’s cross-industry working group’s call to action in July. 

It will be updated following the outcomes of the next instalment in the Lloyds Bank case, which will consider how to treat transferred-out benefits for GMP equality purposes, and the guidance expected from HMRC on tax implications.

The industry now also awaits the publication of guidance from HMRC and refinements to the GMP conversion legislation by the DWP.

Further guidance from the GMP Equalisation Working Group – covering data, impacted transactions and tax – is also expected over the coming months.