Buck’s senior consulting actuary, Paul Butfield, details the challenges schemes will face to equalise guaranteed minimum pensions in past transfers, warning that trustees need to start this process as soon as possible.
GMP equalisation work has been ongoing since 2018, but November’s decision throws up a fresh set of challenges.
Poorly kept records and missing data will make the mammoth task of GMP transfer equalisation almost impossible in some circumstances, but that does not mean trustees should be kicking the can down the road and hoping the problem goes away.
The scale of the challenge
Equalising past transfers is an exercise so potentially complex that many of the schemes affected may have little idea of the size of the challenge they face.
Trustees should start building a plan and mapping out how they might go about locating former members
The first hurdle is tracking down and collating decades of data potentially relating to thousands of former scheme members, a task that will inevitably place a strain on already stretched trustee boards’ time and resources.
Locating affected individuals will also be no easy feat. In three decades, they may have changed address, moved overseas, changed their name, subsequently transferred into a new scheme, or died.
In some circumstances, trustees will have very little to go on, possibly just the name of a former member and the year they transferred out of the scheme. As well as locating the individual, the data used to calculate the original transfer value will need to be gathered.
Once all the necessary data is located, schemes will still have to perform their calculations and determine how to pay their former members.
This should be more straightforward than assembling the data, but there are still problems to solve. In some cases, for instance, trustees may need to find the underlying assumptions that were used to calculate the original transfer value in order to come up with the new, adjusted value.
Trustees will also have to determine how to make the payment. For example, a former member may have transferred to a defined contribution scheme, and the new provider may not accept an extra top-up.
Delaying could be dangerous
The complexity and scale of the task, as well as a lack of clarity from the courts or guidelines from the industry, may mean that some schemes decide to put off this exercise. Postponing the data-gathering process, however, is merely delaying the inevitable and creating future problems.
The first problem is one of timing. Even for schemes that start the process now, the length of time required to gather the necessary data could mean that it may be the mid-2020s before adjusted payments are made to former scheme members.
If schemes delay on this, the GMP equalisation process will simply drag on for longer, draining schemes’ resources for years to come.
The second problem is that the longer schemes put off the data-gathering exercise, the less insight they have into the scale of the challenge they face. For many schemes, the amount of work they must do is currently unknown, but by collating the data they can begin to determine this and start incorporating the challenge into their future plans.
The final and most serious problem is the legal vulnerability of schemes. Put simply, schemes that take no steps to begin the GMP transfer equalisation process are opening themselves up to a potentially costly and damaging legal challenge. Getting the wheels moving now is both legally and financially prudent.
Making a practical start
Schemes that want to begin now will find that despite the unknowns involved, there is ample room for pragmatism in the process.
Trustees should start building a plan and mapping out how they might go about locating former members. In historic cases where member data may be lacking, trustees are expected to take reasonable steps to trace members, but they should acknowledge that this may not always be possible.
When it comes to unknown transfer value assumptions, the same principles apply. Trustees can make informed assumptions based on the market data available from the time of the transfer. Put simply, schemes need to work with the data they actually have.
As painful as it may feel, schemes should start the GMP transfer equalisation process sooner rather than later, even if it feels an arduous task for often a relatively small outcome. Industry guidance will follow, but schemes must acknowledge that although they are at the start of a long and difficult journey, they need to get going.
Paul Butfield is a senior consulting actuary at Buck
