What HMRC’s guidance means for GMP in 2020

Ever since October 2018 the industry has been grappling with how to equalise pension scheme benefits to rectify the differences in GMPs between men and women.

While there are merits to the dual records approach, the majority of trustees have favoured the ‘GMP conversion’ approach, a method that is not addressed by HMRC’s latest guidance

A way has been found through much of the technical detail — helped by the excellent Department for Work and Pensions conversion guidance and industry working group methods guidance — but the one key reason so many schemes are still on the starting blocks is the thorny issue of pensions tax limits.

This is why the industry has been waiting so eagerly for HM Revenue & Customs’ tax guidance. However, the guidance that emerged in February 2020 has unfortunately only answered half the question.

What HMRC has provided

The good news is that the guidance from HMRC is helpful and pragmatic in the areas it does address. For example, the guidance makes it clear that GMP equalisation uplifts will not cause people to lose their ‘fixed protection’ against the lifetime allowance.

This advice, however, only helps in cases where a scheme wants to implement GMP equalisation using a ‘dual records’ approach, where the administrators track the ‘male’ and ‘female’ amounts over time and pay the members the higher amount.

While there are merits to the dual records approach, the majority of trustees have favoured the ‘GMP conversion’ approach, a method that is not addressed by HMRC’s latest guidance.

In particular, schemes that are in the greatest rush to complete GMP equalisation, perhaps because they want to buy out scheme benefits or conduct some other costly risk reduction project, are much less likely to want to use the dual records approach, as it will typically complicate those exercises further.

Unfortunately, this means that HMRC’s tax guidance is of least use to those who were most eagerly awaiting it.

What HMRC has missed out

GMP conversion involves changing GMPs (and some other pensions too) into a different form of benefit, such as a simplified level pension amount. This process is based on the approach set out in the legislation and DWP guidance.

Unfortunately there is a major issue with this approach: schemes are adjusting benefits by more than is strictly necessary to meet the legal requirement of GMP equalisation.

HMRC has clearly grappled with this issue at length and has ultimately decided that the challenge is too complicated for now. This means the latest guidance contains only a vague nod towards giving conversion some consideration, with no fixed commitments or timescales.

Deciding to press ahead with conversion is probably both too risky and unnecessary (for now at least), and schemes that had hoped HMRC’s guidance would provide a clear path to push on with GMP equalisation in 2020 have been sorely disappointed.

Options now available for schemes

Despite the lack of guidance, there are some clear next steps schemes should be considering. For instance, many pension schemes will have large amounts of data analysis to carry out.

Additionally, schemes should put pressure on HMRC to come back to the conversion aspect of its guidance in the near term — a process already begun by a variety of industry voices.

Schemes must also note that conversion doesn’t have to be a means for simplification; a wide spectrum of options is available. One approach is to leave benefits unchanged (other than any changes strictly required for equalisation) and to simply label GMP as something else.

This ‘minimum conversion’ option could be attractive to schemes that are simply seeking the path of least resistance. While this is not explicitly provided for in the latest guidance, it is certainly in line with the spirit of HMRC’s advice.

It therefore seems entirely possible that a route will be found to enable this type of conversion to proceed without major additional guidance or legislative change.

The outlook for 2020

Whatever the eventual routes taken by schemes, there is no doubt this latest intervention from HMRC has swung the pendulum back towards the ‘dual records’ approach — reducing the pressure on actuaries, but heaping additional workload on the administrators.

Indeed, HMRC’s guidance contains a number of difficult challenges for the administrators to work through, such as the need to revisit and reissue past lifetime allowance statements, which will inevitably lead to additional costs for schemes this year.

The outlook is poor for scheme members too, who will have additional work to perform. For example, it’s possible that they may have to restate historic tax returns and handle any arrears payments that may arise because of this.

For all these reasons, the path for GMP equalisation in 2020 remains murky and uncertain. While there are some steps schemes can start to take, we have once again been left waiting for further guidance for which we have no clear timelines.

Mark Williams is principal & London retirement practice leader at Buck