GMP equalisation

Mark Riches

John Fitzgerald

John Small

1

Agenda

• What is a GMP?

• Why do we need to equalise?

• What do we need to equalise?

• How do we equalise?

• The plan

2

What is a GMP?

3

What is a GMP?

• Many employers chose to contract out schemes from the State Earnings Related Pension Scheme (SERPS)

• In return the Scheme provided a pension broadly equal to SERPS called the Guaranteed Minimum Pension

4

National Insurance

Contributions SERPSGMP

£500

‘Excess’

pension

£500

Total

pension

£1,000

5

Pensio

n a

mount

Excess over GMP

(non GMP)

Pre 88 GMP

When did GMP build up?

6 April

1978

5 April

20166 April

198817 May

1990

5 April

1997

Post 88

GMP

Post 97 benefits

Equalisation (Barber) Date

Why do we need to equalise?

6

Equalisation: what is it?

7

The same pension

regardless of gender

Same retirement age

Was 65 for males, 60 for

females in many schemes

NRAs equalised mainly in

the 1990s

Same total pension on

leaving scheme Same benefit payments

Same for males and females

in most schemesBut men and women build up

GMPs on different terms

GMPs… Spot the Difference

Male GMP Female GMP

Accrual rate Lower Higher

Deferred revaluation rates Same*

GMP Payment Age 65 60

Late retirement factor Same*

Pension increase rates Same*

8

But applied to / from different ages (65 and 60)*

Why do we need to equalise?

• We always suspected we needed to equalise GMPs

• We hoped being a copy of state benefits (and set out in legislation) was enough to prevent this

• It isn’t

9

Lloyds Banking Group judgmentsQuestion Answer

October 2018

Is the Trustee obliged to “equalise GMP” to give equal

treatment in the overall pension?

Yes

Is there a single correct method of equalising or a

choice of acceptable methods? If there is a choice,

which one should the Trustee adopt?

A choice – covered later

Any limitation period on back-payments? Depends on Scheme rules

Should interest be paid on back-payments? Yes: Base + 1%

November 2020

Do trustees need to revisit past transfers out? Yes

What do we need to equalise?

11

12

Pensio

n a

mount

Excess over GMP

(non GMP)

Pre 88 GMP

What benefits are affected by GMP equalisation?

6 April

1978

6 April

198817 May

1990

5 April

1997

Post 88

GMP

Post 97 benefits

Equalisation (Barber) Date

13

Pensio

n a

mount

Post 90

Non GMP

AFFECTED

What benefits are affected by GMP equalisation?

6 April

1978

6 April

198817 May

1990

5 April

1997

Post 90

GMP

AFFECTED

Post 97 benefits

NOT AFFECTED

Equalisation (Barber) Date

Pre 90 benefits

NOT AFFECTED

Examples

14

Unequal benefits: Example 1

15

Male

pension

£1,000

payable

from age

65

Female

pension

£1,000

payable

from age

65

• Retire at 65

• Retire from active

• 0% increases on

excess pension

• CPI (max 3%)

increases on GMP

GMP

£500GMP

£600

‘Excess’

pension

£500

‘Excess’

pension

£400

Unequal benefits: Example 1

16

• Retire at 65

• Retire from active

• 0% increases on

excess pension

• CPI (max 3%)

increases on GMP

GMP

£500

‘Excess’

pension

£500

GMP

£510

GMP

£520

‘Excess’

pension

£500

‘Excess’

pension

£500

GMP

£531

‘Excess’

pension

£500

£1,000 £1,010 £1,020 £1,031

Male

Unequal benefits: Example 1

17

Female

Conclusion:

The Male is worse off

than the Female. This

needs to be addressed

Unequal benefits: Example 1

18

+£2 +£4 +£6

GMP

£500

‘Excess’

pension

£400

GMP

£510

GMP

£520

‘Excess’

pension

£400

‘Excess’

pension

£400

GMP

£531

‘Excess’

pension

£400

£1,000 £1,012 £1,024 £1,037

Extra GMP

£100

Extra GMP

£102

Extra GMP

£104

Extra GMP

£106

Unequal Benefits: Example 2

19

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

60 65 70 75 80 85 90 95 100

£ p

a

Age

Male Cashflows Female Cashflows

• Retire at 60

• Retire from deferred

• Male GMP “step up” at

age 65

Unequal Benefits: Example 2

20

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

60 65 70 75 80 85 90 95 100

£ p

a

Age

Male Cashflows Female Cashflows

Female paid

more in total

Conclusion:

“cross-over” members

Some members “behind”

today but “ahead” in

future (and vice versa)

Male paid

more in total

How do we equalise?

21

Lloyds Banking Group case: MethodsMethod Judgment

Employer

consentApproach

AEqualise each unequal aspect of the benefit separately.

BCarry out an annual comparison of the male/ female pension and pay

the higher amount each year.✓ ✓ Dual

C1

Pay the annual pension that would result in the accumulated pension

paid to date being equal to the higher of the accumulated pension

payable to either an unequalised male or female.

✓ ✓ Dual and

Accumulated

C2 As per C1, but allows for interest✓

Dual and

Accumulated with

interest

D1

A one-off calculation determining the actuarial equivalence of

cashflows generated by one of the above methods and then provide a

higher benefit to provide benefits of equal value.

D2 As per D1, but convert all GMP to non GMP ✓ ✓ One off calculation

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The plan

23

So what?

• Benefits may be wrong where GMP built up after 17 May 1990

• Legal requirement to correct

• Small increases to pensions for some deferreds and pensioners

• Pensioners due backpayments, some already dead

• Most of the uncertainty resolved by subsequent cases and industry guidance

24

25

The impact on pension schemes

The impact on members

26

De miniwhat?

27

Can we choose not to uplift a member’s benefit if the adjustment is very small?

Past Equalisation – Key Decision

FINAL METHOD FOR PAST EQUALISATION

COMMS

LIABILITY IMPACT

COST

28

Future Equalisation – Key Decision

COMPARISON (KEEP YOUR

GMP)

CONVERSION (GET RID OF YOUR GMP)

29

Comparison (aka C2 / dual records)

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• Annual checkWHAT?• Valid method of equalising GMPs

• No need for sponsor consentWHY?

• Dual recordsHOW?

• Some upfront costs, some ongoing costsCOSTS?

Conversion

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• One-off process whereby GMP turned into non-GMP

• Can be applied to some or all affected membersWHAT?• Valid method of equalising GMPs

• Simplified benefits (→ admin, investment, buyout)WHY?• Scheme Actuary performs calculations and signs off

• Protections: DB, survivors, pension, actuarial valueHOW?

• More significant upfront costsCOSTS?

Conversion

32

90-97 NON-GMP

90-97 GMP

NON-GMP

NON-GMP

NON-GMP

EXTRA PENSION

Future Equalisation – Key Factors

LIABILITY IMPACTFUTURE

STRATEGYADMINISTRATION

COSTS

ADMINISTRATION SYSTEMS

COMMUNICATIONS

33

GMP conversion

Reasons for:

• GMP equalisation without dual records

• No increase in future administration costs (vs dual records)

• Some members may benefit from removal of GMP restrictions

• Opportunity to simplify benefits?

• Intending to buyout benefits or use a consolidator

Reasons against:

• Higher costs of implementation

• Reshaping benefit will result in winners and losers

• Difficult to communicate

• Disproportionate for some simple schemes

• Tax issues

34

Immediate Actions

35

STOP THE ROT

PAY EQUALISED BENEFITS WHERE POSSIBLE

TAKE STEPS TO LOCATE DATA / PROTECT LEGACY

SYSTEMS

ASSESS YOUR SITUATION

REVIEW GMP RECONCILIATION PROGRESS

ENGAGE WITH ADMINISTRATION &

SOFTWARE PROVIDERS

ASK US TO REPORT ON PAST EQUALISATION COSTS &

METHODS

CONSIDER TRUSTEE KNOWLEDGE AND SKILLS

CONSIDER THE FUTURE

FULL AUDIT OF DATA & BENEFITS?

LONG TERM STRATEGY

SPONSOR ENGAGEMENT

LEGAL ADVISORS

Next steps

36

• Your consultant to investigate and report on your scheme

• Consider need for data / benefit audits

• First Actuarial plan and report back

• Further training www.firstactuarial.co.uk/knowledge-and-news/gmp-equalisation/

• Potentially revisit this training

and our guides

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