Pension experts have welcomed the governments guidance on contracted out benefits, but claim several important questions remain unanswered.
Late last week the Department for Work and Pensions published guidance on the use of the guaranteed minimum pensions conversion, which sets out a 10-step process for pensions schemes to follow after last year’s landmark Lloyds judgment.
In October 2018, the High Court ruled Lloyds bank scheme trustees must equalise benefits between women and men who have GMPs because of contracted out benefits.
The ruling was considered a solution for a pension problem spanning almost three decades, and schemes are now having to decide how to equalise the contracted out benefits of their members.
The guidance, developed in conjunction with an industry working group, provides a recommended road map for scheme trustees to follow in ensuring they comply with last year’s judgment, the DWP said.
One of the solutions being considered by schemes is converting the GMPs into a normal scheme benefit. But the problem with this, from a member's perspective, is that it will likely uplift the value of their pension, which could trigger an annual or lifetime allowance tax charge.
The DWP said it is “considering changes to the GMP conversion legislation to clarify certain issues”, and that the guidance will be updated to reflect these alterations.
On the tax implications of converting benefits, the DWP said the issue was still being discussed by HM Revenue & Customs.
Stephen Scholefield, a partner at law firm Pinsent Masons, welcomed the guidance but said it “adds little to what we already knew”.
He said: “It means that schemes can now start to think about how they should address the inequalities created by GMPs, and the practical challenges this will create.
“As the guidance acknowledges, there are plenty of areas where professional advice will be required and HMRC’s guidance will be influential – hopefully that will be available soon.”
David Everett, a research partner at LCP, stressed that the 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”.
“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,” he added.
Mr Everett welcomed the fact that the guidance was acknowledged to be a first edition, with the likelihood of it being updated as clarity is achieved on a number of important points.
He said: “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.”
Guy Opperman, the pensions minister, said the new document is vital guidance which will provide pension trustees with the “detailed road map they need to navigate this complicated equalisation process, ensuring they can meet their legal obligations”.
“I am determined to ensure that pensions are fair for everyone and this guidance will help achieve this,” he added.
maria.espadinha@ft.com
