On the go: The cost of addressing inequality in guaranteed minimum pensions may be a lot lower than expected at less than 1 per cent of total liabilities for over half of all schemes, according to consultancy XPS Pensions.
The finding is based on a survey of more than 90 XPS clients with a December 31 2018 year-end.
Commenting, Wayne Segers at XPS Pensions Group said: “This is good news for employers and shows the value of getting a robust estimate that takes into account the specifics of their schemes.”
In October 2018, the High Court ruled that defined benefit pension funds must equalise GMPs between men and women. Pension schemes will have to fix GMP inequality going back to 1990.
Segers warned: “The industry may now incur significant cost and administrative complexity with little real benefit for members. Given that, it is important schemes use the work needed on GMPs to drive improvements.
“Increasing data quality, streamlining benefits and removing GMPs for good can all help reduce cost and risk for employers, and help drive better options and outcomes for members,” he added, advising schemes with March year-ends to err on the side of caution in their cost estimates.
One major problem will be the lack of historical data and poor legacy files. A recent survey of sponsors, trustees and advisers regarding the implication of the Lloyds Bank case found that 61 per cent did not expect their scheme – or those they advise – to have sufficient data to equalise members’ benefits.
The research, carried out by law firm Herbert Smith Freehills, also found that 53 per cent of respondents identified the ongoing administration associated with paying equalised benefits as the biggest challenge in implementing the judgment.
Samantha Brown, pensions partner at Herbert Smith Freehills, noted that, in order to implement GMP equalisation, schemes will need salary data going back nearly 30 years.
“Many schemes will not have retained this information, particularly for pensioners, as it is common for schemes to cleanse data that is no longer needed once pensions have come into payment,” she said.
HMRC issued guidance on Wednesday on how to convert GMPs into other scheme benefits and equalise pensions to remove inequalities. It states: “A proposed methodology can be used – but is not the only method available.
Schemes may choose this methodology or another. They are recommended to take their own legal advice when considering and undertaking equalisation.”
