John Cormell, Head of GMP equalisation at Barnett Waddingham, said; “We welcome the straightforward guidance from the DWP which confirms the approach to conversion they had previously proposed in 2016. It confirms our understanding that no new legislation is needed which will be welcome news for schemes who can now plan the way forward.
“However, many questions on the detail of implementing equalisation remain unanswered. The emphasis is now very much on HMRC to explain the tax treatment of any benefit changes from GMP equalisation and conversion.
“GMP equalisation is a detailed process that produces benefits more complex to administer. GMP conversion means following a similar process but producing benefits that are simpler to administer and potentially cheaper to secure with an insurer. We expect many schemes to take advantage of the opportunity that conversion offers.”
Anna Rogers, Senior Partner at ARC Pensions Law: “DWP guidance issued today spells out how DB pension schemes can convert benefits into a different shape to eliminate the remaining discrimination between men and women. Benefits can be converted in order to erase the GMPs that accrued between 1978 and 1997. This enables schemes to remove the sex discrimination caused by 1990-97 GMPs. It also allows them to simplify their admin and potentially access more cost-effective insurance pricing.
"Insurers have commented that converted schemes will be at the front of the queue for buy-ins in a crowded market. There have been very few conversions to date for various reasons, and there are still some obstacles in legislation that will affect different schemes differently. Members’ benefits have to be protected – the replacement benefits have to be certified to be actuarially equivalent, and pensions in payment can’t go down.
"In practice, we expect some schemes will be looking for ambitious restructuring that would see the current pension go up significantly, by front-loading the future pension increases. That has implications for some members who might face tax charges as a result, so care will be needed. There is a legal trap for schemes where the employer has changed over the years because the employer’s consent is required, and it may not be obvious what that means in practice. The calculations are complex, and the first conversions may be a headache, but we expect that, over time, the conversion may become a standard part of the journey to buyout.“
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