GMP equalisation and conversion: new guidance and survey results

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Following guidance issued by the Guaranteed Minimum Pension (GMP) Equalisation Industry Working Group, research by Barnett Waddingham finds that many schemes’ preparations for dealing with GMP equalisation are well underway.

Surveys from our annual London Pensions Trustee Conference earlier in the year, revealed that around 50% of schemes have already taken steps to adjust benefits (e.g. transfer values) or have a formal plan in place to do so.  

On 30 September, the GMP Equalisation Industry Working Group published the first in a series of “good practice” guides to UK pension schemes for applying GMP equalisation. The guidance is helpful in that it gives a clear steer on how schemes can go about GMP equalisation and GMP conversion and provides reassurance on the approach taken by advisers who are already progressing their equalisation exercises. 

Whilst the GMP equalisation guidance considers some thorny issues such as transfers in and survivors’ pensions, it does not prescribe the exact approach to be taken in these and other areas. This is to be welcomed as it should allow trustees and their advisers to find pragmatic solutions to deal with the specifics of their schemes, such as data issues and historic administrative practice.

HMRC have also promised guidance setting out how to deal with the tax implications of adjusting benefits for GMP equalisation, and with the first instalment of the working group guidance now available we really need HMRC to engage with this and deliver clarity on the taxation issues in order to allow schemes to press ahead with confidence.  

A further instalment of the Lloyds Banking Group case is due to be heard in the High Court in the second quarter of 2020 and the industry working group intends to publish further guidance to cover data issues, impacted transactions (i.e. paying benefits), tax issues and reconciliation/rectification of GMPs in due course. 

The outcome of this further Lloyds case hearing and the guidance provided by HMRC and the Industry Working Group should provide sufficient clarity for schemes to begin GMP equalisation and conversion projects in earnest. Schemes may wish to act quickly to avoid compounding the effects of providing benefits on an unequalised basis. 

Despite the desire for further equalisation guidance from HMRC, it appears likely that GMP conversion will form a part of the GMP equalisation process for many schemes.  Reponses from our London Pensions Trustee Conference to the question “would you consider GMP conversion following on from a GMP equalisation exercise” showed that over 80% of trustees are open to this method, with 50% of those that responded attracted by the simplification advantages that conversion offers.

A fly in the ointment, for GMP conversion in the short term, is the government consultation on changing Retail Prices Index (RPI) – trustees will likely want a degree of certainty on this issue before considering conversion to or from RPI linked benefits.  

It is reassuring to see that many schemes are carrying out the preparatory steps in order to be well placed to carry out their GMP equalisation and GMP conversion projects as soon as HMRC and the government deliver clarity on the taxation issues and possible changes to RPI.