Pensions - Articles - The way forward for GMP conversion

 By John Cormell, FIA, Associate and Richard Gibson MA FIA, Partner and Head of Longevity Risk Transactions at Barnett Waddingham

 Lloyds court case
 Pension schemes have known about the need to equalise GMPs for over 20 years but most have not taken action to date due to the complexities of the subject and the lack of clarity.

 On 26 October 2018 the High Court of Justice ruled that the Lloyds Bank pension schemes do have to carry out GMP equalisation, with the ruling being expected to broadly apply to other ongoing pension schemes.

 The case described year-on-year comparison methods of GMP equalisation which will be onerous for ongoing schemes to adopt, with more expensive options needing employer consent.

 The silver lining from the Lloyds Bank judgement is that it also provided clarity over using the GMP conversion regulations. This also requires employer consent but that is unlikely to be withheld if trustees and employers are working together to find the optimal solution.

 GMP conversion
 GMP conversion considers the actuarial value of the unequalised male and female pensions and converts the more valuable of the two into a new benefit structure, thus achieving equalisation and hopefully some significant simplification.

 GMP conversion legislation considers not just GMP but all pension earned before 6 April 1997. So we could change our pension schemes to have a single benefit structure for all pension accrued pre 6 April 1997.

 The skill is in picking a new benefit structure that successfully negotiates the various hurdles described later, but conversion has the potential to:

 Achieve GMP equalisation as a one-off exercise without the need to carry out a year-on-year comparison
 Make the scheme simpler to understand for members
 Reduce risk within the scheme such as inflation risk
 Make the scheme easier to administer
 Reduce ongoing administration costs
 Reduce buyout cost

 A key consideration will be the impact on members. How will they feel about any changes? We’re exploring the feasibility of conversion with our clients and we would encourage others to do the same, bearing in mind the impact on members and the hurdles set out below.

 Hurdles

 How does conversion compare with equalisation?

 It may come as a surprise, but GMP equalisation has been carried out for 15+ years for schemes winding up and more recently for schemes going into the PPF. At Barnett Waddingham we have carried out GMP equalisation for over 100 schemes using a range of methods including cases for our role on the PPF’s specialist panel.

 We have the capability to equalise GMP using whatever method our clients ultimately select and have our own administration systems that can be programmed to carry out the various different year-on-year methods of GMP equalisation for each individual.

 However, whatever method is ultimately chosen to equalise GMP going forward, an exercise will be needed to equalise benefits already paid and adding on a conversion exercise to cover both the past and future in one go seems like an attractive option.

 Conclusion
 Imagine being able to explain the scheme’s benefit structure without referring to detailed schedules and anti-franking rules. Imagine a pension scheme that is easy and straightforward to govern. Imagine a world where pension scheme administration is cheaper too…

 That may all be a leap of imagination too far but for bold companies and trustees willing to grasp the nettle we think it is possible to achieve a genuinely simpler pension scheme.