Willis Towers Watson welcomes the publication of new Government guidance on how schemes can convert Guaranteed Minimum Pensions (GMPs) into other benefits, but says that more clarity on tax treatment is also needed before trustees will commit to this course of action.
Richard Akroyd, senior director at Willis Towers Watson, said: “There is significant demand from schemes wanting to convert GMPs into other benefits: in a recent Willis Towers Watson survey, more than three quarters of respondents thought their schemes were likely to go down this route.
“The DWP guidance provides some reassurance about what the legislation permits and lists the main steps that schemes need to take.
However, schemes will be reluctant to commit to conversion until they know the potential tax consequences for members. That requires clarification from HMRC, both regarding conversion and GMP equalisation more generally. If HMRC decides that changes in the law are needed, that will obviously take time, but schemes will be looking for a steer as soon as possible.”
Pension schemes’ interest in conversion stems primarily from the requirement to equalise pensions accrued by men and women between 17 May 1990 and 5 April 1997, but all GMPS can be converted. This potentially affects scheme members who were accruing pensions between 1978 and 1997.
Richard Akroyd said: “Converting GMPs into other benefits avoids the need for schemes to keep dual records; without conversion, schemes will need to record the pension that the member actually received in each year and what someone of the opposite sex would have received, to ensure that treatment from retirement to date has not left anyone out of pocket. There are further advantages, especially where the scheme also converts GMPs accrued before 17 May 1990: converted benefits may be cheaper to insure and there are fewer restrictions on the options that members can be given.
“Against this, trustees may be reluctant to reshape members’ benefits significantly without giving them a choice. For example, even though changes must be on neutral terms, altering pension increase rules and adjusting the starting level of pension accordingly can lead to some members getting more or less over their lifetime, depending on how long they live and on what inflation turns out to be in future years. For some trustees, this may be a reason not to covert GMPs at all; for others, it may be a reason to opt for changes at the less dramatic end of the spectrum and adopt a more minimal intervention approach.”
David Everett, Research Partner at LCP said: “GMP conversion has a lot of potential, enabling schemes to remove inequalities and simplify benefits.
This guidance is a useful first step to assist trustees and their advisers who may be thinking of using the GMP conversion legislation to resolve the GMP inequality issue brought into focus by last year’s High Court judgment involving the Lloyds Banking Group.
However, more needs to be done, by both the DWP, HMRC and the Courts before much needed clarity is achieved on how to operate this approach in practice.”
I welcome the fact that this guidance is acknowledged to be a first edition, with the likelihood of it being updated as clarity is achieved on a number of important points. Perhaps the true significance of this document in its present form is that it demonstrates that conversion is a viable and practical option – and one which may well be sought by the majority of trustees as a cleaner long-term solution than having to commit to the complexity of running a dual record system for many decades into the future.”
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