Defined Benefit  

GMP cost could be lower than expected

GMP cost could be lower than expected

The costs of accounting for GMP equalisation could be less than 1 per cent of total liabilities for the majority of defined benefit (DB) schemes, according to data from XPS Pensions Group.

XPS had surveyed about 90 of its clients with a December 31, 2018 year-end to calculate their GMP equalisation costs.

For 57 per cent of defined benefit (DB) schemes, the cost amounted to less than 1 per cent of total liabilities, while 17 per cent of schemes said the costs were between 1 per cent and 1.5 per cent.

A total of 12 per cent of schemes faced costs ranging from 1.5 per cent to 2 per cent of total liabilities; 4 per cent said the costs were 2 per cent to 2.5 per cent, and a further 10 per cent of clients had costs between 2.5 per cent and 6 per cent.

Fears have grown over the cost of guaranteed minimum pension (GMP) equalisation following last year’s landmark High Court ruling that UK DB pension schemes must equalise for GMP benefits between men and women.

FTAdviser reported in November that about a sixth of DB pension schemes had put a temporary hold on pension transfers while they decided how to equalise the contracting out benefits.

Wayne Segers, head of transactions at XPS Pensions Group, said: "This is good news for employers and shows the value of getting a robust estimate that takes into account the specifics of their schemes."

He added: "However, it appears to confirm a worry that the industry may now incur significant cost and administrative complexity with little real benefit for members.

"Given that, it is important schemes use the work needed on GMPs to drive improvements. Increasing data quality, streamlining benefits and removing GMPs for good can all help reduce cost and risk for employers, and help drive better options and outcomes for members."

Mr Segers said schemes with a March year-end would benefit from a robust estimate of the cost to prevent charging any more than is needed in their accounts.

He said: "While there are some rules of thumb on costs, for example lower costs if GMPs are a smaller part of the benefit, in most cases the costs are impacted by the specific circumstances and membership behaviour in each scheme."

Stephen Scholefield, partner at Pinsent Masons, said: "These figures are looking at the scheme as a whole. But on an individual level, some members in that scheme may have zero costs, while others will have costs of 10 per cent.

"Some actuaries have told us that the costs may be as high as 20 per cent for some individuals, but that will be a relatively small number of members within a scheme."

The ruling in the Lloyds court case last October will see final salary scheme members who contracted out receive millions of pounds in back payments.

The ruling concerns a case brought by the trustees of Lloyds Bank's DB schemes last summer.

Justice Morgan ruled the trustees must equalise benefits between women and men who have guaranteed minimum pensions as a result of contracted out benefits.