GMP equalisation – what you need to know

Estimated reading time: 3 minutes

To date, GMP equalisation has primarily been carried out for pension schemes buying out or transferring to the PPF, with ongoing schemes deferring the exercise. 2019 could be the year that all this changes and it will be important for schemes to get ready.

What is the Guaranteed Minimum Pension?

The Guaranteed Minimum Pension (GMP) is the minimum pension entitlement for members who were contracted out of occupational pension schemes, salary-related pension schemes (COSRs) and State Earnings Related Pension Schemes (SERPS; now known as the State Second Pension) prior to April 1997.

Legislation sets out the method for calculating GMPs which leads to inequality, because GMPs are payable at different state pension age (65 for men, 60 for women) and will accrue at different rates. 

Is GMP equalisation a legal requirement?

Yes. Since 17th May 1990, there has been a problem balancing out the treatment of men and women equally in occupational pension schemes and the importance of contracted-out schemes providing Guaranteed Minimum Pensions. After the Barber Case ruled that men and women should be treated equally and consequently changed the retirement age for men and women to 65 with benefits adjusted to create equalisation. 

So, if GMP equalisation is a legal requirement, why have many ongoing schemes not yet carried it out? The main reason is uncertainty over the methodology to use and the concern that if they do it now, they may have to revisit the exercise if a different method is ultimately prescribed.

Lloyds Bank GMP equalisation case

The uncertainty could be removed later this year by the Lloyds court judgement. In July 2018 Lloyds bank, together with the Affinity trade union and the trustees of three Lloyds pension schemes, went before the High Court seeking clarification on GMP equalisation. 

The court case is expected to decide whether or not GMP equalisation applies to the Lloyds schemes and what calculation method should apply. Following the ruling, industry practice may change immediately or may wait on the outcome of any appeals or further guidance from the DWP.

Brexit isn’t expected to change the legal position so this is not a reason to delay.

There may also be an opportunity to simplify your scheme through GMP conversion – more on this to follow.

How can I get my scheme ready for GMP equalisation?

GMPs should be fully reconciled with HMRC and rectified – if not, let us know and we will help.

The Lloyds court ruling is likely to affect actions by schemes in wind-up. For ongoing schemes it is likely to raise strategic questions over whether ongoing schemes should:

●    reserve for GMP equalisation in their funding basis
●    carry out a GMP equalisation exercise to adjust the scheme benefits being administered

Schemes that do decide to proceed with a GMP equalisation exercise will need to consider:

●    what method of GMP equalisation will be best for their scheme?
●    will they also carry out GMP conversion?
●    the impact of the exercise on administration, members’ reactions, affordability of buyout, ongoing costs 

Editor's note: Information on the case ruling can be found here: Lloyds: High Court rules on GMP equalisation