On the go: Around one in six companies face the unwelcome prospect of having to include the cost of guaranteed minimum pensions adjustments in their 2020 annual accounts, according to analysis by LCP.
Pensions Expert reported late November about the “Herculean task” facing pension schemes as a result of the High Court ruling that GMP equalisation must extend to transfers going back 30 years.
Though analysis by Aon found that only 25 per cent of members would be due a top-up, LCP has found that in roughly 15 per cent of cases the sums involved are significant enough to warrant inclusion in their sponsors’ accounts for the current year.
This leaves affected schemes in the unenviable position of having to conduct a significant data exercise in the last days of this month.
The 15 per cent figure comes from an assessment drawn up by LCP partner Phil Cuddeford, and applied to a sample of the company’s clients.
The consultancy is proposing a three-step process to tackle the issue. First, schemes should obtain historical accounts going back to 1990 and look for figures on past amounts transferred out, adding interest where appropriate.
The second step is for schemes to make assumptions about the proportions of transfers out in line with the assumptions made in company accounts after the earlier GMP equalisation judgment in 2018, when the High Court first ruled that the GMPs of men and women should be equalised.
The final step is for schemes to assess whether the resulting figure exceeds the threshold for materiality that would require the company’s 2020 accounts be adjusted.
“Companies preparing their annual accounts for 2020 will not welcome this court judgment coming close to the end of the year,” Mr Cuddeford said.
“Firms will already have had to take account of an earlier judgment on the same topic, but now they need to assess whether they will have to make changes in respect of people who are no longer even members of their pension scheme and who have transferred out.
“However, there are a few rules of thumb that companies can use, which will help to reduce the number that have to go through complex calculations in order to come up with a figure for their annual accounts.”
A number of additional checks may help the sponsors worried about applying the ruling in time for their 2020 accounts, he continued.
For instance, schemes should not assume, where earlier scheme accounts are missing, that the transfer figures in need of adjustment will be as large as in recent years.
Mr Cuddeford explained that a lot of transfer activity was sparked by the introduction of pension freedoms in 2015, meaning earlier years are likely to have seen fewer transfers than recent years.
Additionally, schemes should be cognisant of the fact that trustees are likely to make choices about how they implement the court ruling, and some may see a lack of historic data as making it impossible to calculate the top-up owed to some members who have transferred out, he said.
Accounting for this eventuality may reduce the theoretical maximum cost of equalisation below the materiality threshold for some schemes, and should not be discounted.
