Following a major clarification regarding the way pension schemes must treat guaranteed minimum pension (GMP) benefits, the need for specialist and tailored advice has never been greater.
In October 2018, the UK High Court ruled that Lloyds Banking Group must equalise the impact of GMP for men and women who had been contracted-out of the top-up state earnings-related pension scheme between 1990 and 1997.
The case has widespread repercussions for the industry as a whole, as it means schemes need to equalise for the effect of relevant unequal GMPs between men and women in relation to pensions dating back 30-plus years.
The decision is expected to impact around 80 per cent of defined benefit (DB) schemes, which adopted the option of GMPs in order to benefit from the lower national insurance environment that the now defunct contracting-out regime allowed for.
Defined contribution (DC) schemes that have DB benefits underpinning their DC benefits could also be affected.
In overall terms, the financial impact of GMP equalisation on pension schemes is likely to be much smaller than originally feared. A recent survey by XPS Pensions Group suggested the cost of addressing inequalities will be less than 1 per cent of the total value of liabilities for most schemes – far lower than figures of up to 5 per cent that were previously put forward by some companies.
Nevertheless, schemes which may already have gone, or are going, through a reconciliation exercise now need to go through an equalisation exercise for a large number of members – and this has the potential to be costly, complex and time-consuming.
Schemes will be looking to advisers and administrators to provide a simple, efficient and pragmatic solution – one that presents information in a packaged and clear way and which involves stakeholders and sponsors only when it needs to.
Equalising GMPs is by no means a simple exercise, given that schemes need to revisit and reconcile around three decades’ worth of pensions. Those pensions are likely to have been administered in a variety of different ways and will stem from the days when many records were kept on paper rather than electronically.
Schemes at the start of their GMP equalisation journey should start by seeking some initial legal advice.
It is clear from the Lloyds judgment that schemes may have certain rules in place that make one equalisation method more suitable than the other.
By obtaining legal advice early on, schemes will be in a stronger position while they carry out their reconciliation and rectification processes and before they begin their GMP equalisation exercise in earnest.
Once legal advice has been sought, schemes should start reviewing their GMP data, assessing previous administrative practices and evaluating the actuarial factors used for calculations.
If there are gaps in the data, they will need to seek information from previous advisers, actuaries and administrators. Where data is unreliable there is scope for making pragmatic adjustments, but the starting point is to do a fact-finding exercise.