Mercer has cautioned that the government’s consultation on equalising pensions for the effect of Guaranteed Minimum Pensions (GMP equalisation) is an unnecessary diversion. Following it with an announcement that it wants to deregulate and reinvigorate pension provision suggests, says Mercer, that the Government has not understood how the pensions industry operates.
“Imposing GMP equalisation on schemes introduces new risks to pension scheme management, when trustees should be concentrating on managing those they already have,” said Deborah Cooper, partner and head of Mercer’s retirement research. “It is not at all obvious to us that there is a legal requirement for this ‘equalisation’ to go ahead, particularly in the way suggested, so it seems an unnecessary, costly diversion.”
According to Mercer, GMPs were only intended to underpin scheme benefits, rather create a separate benefit entitlement. The consultancy believes that if the Government accepted this view, while the issue of equalisation would not go away entirely, it would become far simpler, and far less costly to implement.
“In the light of its policy to reduce ‘red tape’,” believes Dr Cooper, “the Government could take the view that GMP equalisation will not serve, and may distract from, its priority aims that defined benefits should be solidly funded and the Pension Protection Fund (PPF) protected.”
“Before choosing to channel employers’ money into such an unproductive area, when companies are facing the risk of recession, employees’ pay is falling in real terms and defined benefit security is often deteriorating, the government should consider other solutions”, she stated.
The government has accompanied its consultation with a document setting out a “possible method” for schemes to achieve equalisation. However, the consultancy believes that the method will impose material costs on employers with DB schemes, over and above those required even if the Government’s position that equalisation is necessary is accepted. Overall, the process has been badly managed by the Government, which, contrary to its usual policy, has failed to publish an impact assessment.
Depending on the solutions adopted, the consultancy recognises that the cost could be spread across all members over several years, although in some cases cost will disproportionately be concerned with implementation and administration. However, it believes few scheme members’ pensions will show anything other than a nominal increase.
Mercer considers that the consultation document shows that the government has not understood how pension schemes operate in practice, nor fully considered the wide range of complex calculations that could be required.
“It suggests that, to achieve equalisation, both men and women’s pensions might need to be increased, which seems to us to go far beyond the principle of equal overall benefits,” said Dr Cooper. “The GMP formula, which creates the problem, is set in legislation and designed originally to reflect the unequal state benefits at the time, so it seems to Mercer that it should be for the government to fix it by amending the relevant legislation rather than imposing additional costs on employers, decades later.”
In the meantime, trustees having to make decisions about securing benefits, for example buying out with an insurance company, will need to continue to seek additional advice to determine how to deal with GMP inequalities and to what extent this new guidance needs to be taken into account.
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