Schemes to spend £1.5bn on GMP equalisation past transfer top-ups

The High Court ruled in November on the issue of GMP equalisation, finding that trustees had committed a breach of duty if they had not equalised GMP benefits at the time the cash equivalent transfer value was made.

The court ruled that schemes must revisit transfers made since May 1990, which has been described as a “Herculean administration challenge” that could, in many cases, yield top-ups of only a few pounds.

Buck’s research revealed that schemes will have to revisit more than 400,000 past transfers as part of the rectification exercise, representing a total of £40bn in transfer payments.

GMPs have provided the pensions industry with an administrative nightmare, and it is a nightmare that has yet to be concluded

Tim Middleton, PMI

But the problem continues to grow. Not only have a majority of schemes yet to begin the process of equalising past transfers, many continue to make unequalised transfers.

Buck polled around 300 pension professionals and found that more than a third (36 per cent) of schemes continue to make unequalised transfers, which the consultancy noted will add to the amount of equalisation work they will eventually have to undertake.

Mark Williams, principal at Buck, warned that the challenge “should not be underestimated”.

“For many schemes, even just locating the affected individuals will be a challenge. Over the past decades, former scheme members may have moved, changed their name, transferred again into a new scheme, or even died,” he said.

"In some cases, trustees may have little more information to go off than the name of a scheme member and the year they transferred.”

Williams cautioned, however, that the difficulty should not prevent schemes from “facing it head on”.

“Trustees need to act now to avoid prolonging the process and creating future problems for themselves. The first step should be to start building a GMP equalisation plan and begin collating the necessary data, as indeed we have already started to do at Buck in partnership with our clients,” he said. 

“Whatever approach trustees decide to take, it’s vital that they begin making reasonable progress now to ensure they are not opening themselves up to a potentially costly and damaging legal challenge later.”

Timing ‘could hardly be worse’

Tim Middleton, director of policy and external affairs at the Pensions Management Institute, told Pensions Expert that the exercise of correcting 31 years worth of past transfers is rife, with problems such as those laid out by Williams.

The financial costs of equalisation would, however significant, “be dwarfed by the gargantuan administrative expenses as schemes struggle to revisit decades of past transfer values”, he said.

“At a time when trustees and sponsors are struggling to reduce deficits and to prepare for the imminent demands of the incipient pensions dashboards, the timing could hardly be worse.”

Tom Yorath, partner and head of GMP equalisation services at Aon, noted that there are problems gauging the true cost of equalisation as averages are of limited use.

“Some schemes have started to address the historic problem at an individual level and a few have started to make payments to members. Across the GMP equalisation exercises that we have worked on, the average top-up amounts payable have been in the region of around £3,000,” he said.

“Having said that, with many members receiving small top-ups, averages aren’t a particularly useful indicator. Many members will have already received the correct benefits and will not be entitled to a top-up. At the other end of the spectrum, top-ups are occasionally in excess of £10,000.”

This leads to a further issue: how to make these payments, since “receiving schemes are sometimes reluctant to receive small top-ups”, Yorath noted.

It is a problem that Alasdair Mayes, partner and head of GMP equalisation at LCP, was similarly keen to highlight.

“Based on the equalisations we have already completed, top-ups will in many cases be small or nil,” he said.

“For a few individuals they will be thousands of pounds. A key question will be whether the new pension arrangement the member transferred into will be willing to accept the often small top-up.”

Nightmare ‘has yet to be concluded’

Society of Pension Professionals president James Riley told Pensions Expert that schemes should be proactive when considering how to address past transfers, but noted that the High Court judgement “gives a degree of latitude to schemes about if and how they address them”. 

“As a first step we urge schemes posting unequalised transfers to update their processes, as action now will save considerable time and effort in the future,” Riley said.

However, Middleton cautioned that there has as yet been no guidance as to how GMPs should be equalised, and this could be storing up further problems for the future.

Pensions Expert has reported previously on calls by the industry for more clarity from the government — for instance, around the tax implications of equalisation.

Existing guidance from the Pensions Administration and Standards Association and HM Revenue & Customs dealt with some outstanding issues, but left many more questions unanswered.

Though more guidance is expected from PASA by the end of this month, the industry has not been told of anything further in HMRC’s pipeline. 

“Any action taken now may well require further rectification at a future date,” Middleton warned. 

“GMPs have provided the pensions industry with an administrative nightmare, and it is a nightmare that has yet to be concluded.”