The GMP Equalisation Working Group of the Pensions Administration Standards Association (PASA) has been busy over the summer and early autumn publishing a series of guidance notes to help schemes implement the requirement to equalise GMPs between men and women. A Guide on GMP Conversion was published in July, one on Transfers in August and two more in September - one on Member Communications and another on Anti-Franking. With input from a number of industry sources, the guides are a helpful indication of the way in which the industry is approaching the difficult task of unpicking historic unequal GMP benefits, correcting them and communicating this complicated issue to members. However, the guides themselves should not be relied upon as advice and do note a number of areas in which trustees should seek advice and give further consideration.
Click below to jump to our summary of the relevant guide.
Transfers
Conversion
Anti-franking
Member communications
Who should read this update?
This update will be of relevance to any occupational pension scheme with GMP benefits, including where those benefits have been transferred in from another scheme. We signpost the most useful takeaways for trustees and their advisers from the four new PASA guides.
Recap: What are GMPs and why do they need to be equalised?
Guaranteed Minimum Pension (GMP) is a form of benefit provided by pension schemes in the past as an alternative to the second state pension. Schemes that contracted out of the second state pension were permitted to do so only if they agreed to provide a specific form and level of benefit through the scheme instead – the GMP. GMP benefits were only accrued between 6 April 1978 and 5 April 1997. During this period, state pension benefits (and, in particular, state pension ages) between men and women were unequal and therefore GMP benefits also accrued on the same unequal basis.
Readers will be familiar with the Barber decision, in which the ECJ held that normal retirement ages must be equal for men and women in order to uphold the principle of equal pay. This applied in respect of benefits earned on and from 17 May 1990. However it was not until the Lloyds judgment in 2018 that it was confirmed that the obligation to equalise post 16 May 1990 benefits extended to GMPs as well. Since then, trustees are under an obligation to equalise GMPs held by the scheme, which were accrued by members between 17 May 1990 and 5 April 1997 (referred to as the 'Equalisation Period').
Transfers
By now, most schemes will have taken steps to ensure that any new transfers out of the scheme are being made with an adjustment for GMP equalisation. However, the Lloyds 2020 decision made it clear that trustees also have a duty to revisit historic transfers and equalise those too. This means that 'where the transfer value actually paid would’ve been higher at the time had the value of the member’s benefits and the mix during the Equalisation Period between GMP and excess been that of a comparator of the opposite sex' a top up payment will be required, including interest for late payment.
The Guidance highlights the following points which will be of interest to transferring schemes who have made individual transfers:
- Scope – there is no time limit on the lookback period. If the transfer included unequalised GMP benefits, on the face of it, it is within the scope of the correction exercise, no matter how long ago;
- Proactivity – the guidance highlights that whilst Lloyds 2020 indicated trustees needed to be proactive in addressing historical underpaid transfers, trustees are permitted to take account of 'factors like the cost of calculation, data issues and other practicalities' when working out their process for correction but it is clear they must have an agreed process. The guidance notes that taking advice will be essential since 'perfection' is unlikely to be achievable.
Trustees of transferring schemes who have made individual transfers should document their agreed procedure in relation to the following key areas:
- Dealing with missing data – depending on what data is missing, workarounds could include making a reasonable estimate and/or contacting the member to request information,
- De Minimis – it may be possible to adopt a de minimis policy when agreeing which historic transfers should be revisited. However, given that Lloyds 2020 confirms there is no cut off point or de minimis amount which trustees can universally apply to exclude any historic transfers from scope, the guidance states that professional advice should be taken before adopting such a policy;
- Missing members – what actions should be taken to trace former members and at what cost. There is a suggestion that trustees may wish to set a limit on the amount spent on tracing activities and instead agree to retain the liability in the scheme until a claim is made, particularly where members have moved outside the UK. Decisions should also be made as to how to proceed when a former member has died – should the top up be paid to a surviving spouse or family member?
- Discharging top up payments – what is the trustees’ policy on how they should proceed where a top-up payment cannot be made to the original receiving scheme e.g. because it no longer exists, the member has since transferred out or the scheme won’t accept a top-up? Options could include paying a cash lump sum direct to member (tax treatment will need to be considered) or retaining the payment in the scheme pending a claim.
The guidance also comments on the uncertainty surrounding the obligations of trustees of receiving schemes of individual transfers following the Lloyds 2020 decision. This is because the interaction between this decision and the earlier decision in the Coloroll case is not clear. Two potential scenarios that flow from the uncertainty are either:
- a top-up payment is owed by the transferring scheme even though the service credit awarded by the receiving scheme means the member has not in fact suffered any disadvantage in the receiving scheme; or
- there may be no top-up payment owed by the transferring scheme (because the transfer value paid may have exceeded that of the comparator) but the benefits awarded by the receiving plan are such that the member may be disadvantaged when they come into payment and therefore an adjustment is required.
This means that receiving schemes will need to decide whether to equalise the benefits they granted in respect of an original transfer payment, and how these should be dealt with as part of the wider GMP equalisation exercise. A receiving scheme has no legal obligation to accept a top-up payment from the transferring scheme so trustees will need to make a policy decision as to whether they are willing to do so as it is entirely possible that the costs of administering the top-up payment to exceed its value. If trustees of receiving schemes do agree to accept top-up payments, they will need to decide how the additional benefit will be provided and specific legal advice obtained before making any adjustment.
Lloyds 2020 did not confirm whether trustees of receiving defined contribution schemes are required to correct inequalities resulting from individual transfers in but the PASA guidance proceeds on the basis they are not. However, where the former member remains a member of the receiving DC scheme, the guidance expects that such a scheme would accept a top-up payment if the member consents and any required administration fee is deducted.
For completeness, the guidance also considers bulk transfers. It is noted that where these are on a mirror image basis the receiving scheme assumes an obligation to equalise GMP benefits where inequalities existed in the transferring scheme for those members. Where a bulk transfer was not on a mirror image basis, specific advice will need to be taken.
Conversion
One of the methods identified in the Lloyds case for equalising GMPs is conversion of those GMPs into other forms of benefit (i.e. method D2). The PASA guidance aims to show schemes how they might equalise using GMP conversion 'in a proportionate and pragmatic way in the absence (at the time of writing) of further guidance or legislation from DWP and HMRC' but it is not intended to advocate a particular course of action.
Whilst it is only the GMP accrued between 17 May 1990 and 5 April 1997 that is converted, the GMP conversion process does not just involve the member’s GMP. This is because both the GMP and the pension in excess of the GMP will need to be modified to achieve equality. The conversion process therefore normally involves a member’s whole pension accrued to 5 April 1997, including that accrued before 6 April 1978. Whilst in theory it might also be possible to modify post 5 April 1997 benefits the guide notes that, in practice, early adopters of GMP conversion have not tended to do this. Trustees need to be satisfied any amendment is 'necessary or desirable as a consequence of, or to facilitate, the GMP conversion'.
The guidance identifies three scenarios in which GMP conversion for the purposes of achieving equalisation of GMP benefits may be undertaken:
1. a bulk one-off exercise for existing pensioners and dependants
2. an at retirement process
3. a bulk one-off exercise for deferred members.
Each of these is considered in detail in the guidance, with examples of processes / timelines, and also worked examples for six fictitious members. The guidance explains the pensions tax issues raised in the context of GMP conversion to achieve equalisation of GMPs, including in relation to annual allowance and fixed protection but stresses the importance of obtaining specialist advice on the topic.
Anti-franking
These two words send shivers down the spines of most pension professionals but the guide makes clear that all schemes need to get to grips with this obscure piece of legislation and consider anti-franking as part of implementing GMP equalisation. The anti-franking test itself is set out in section 87(3) and (4) of the Pension Schemes Act 1993. In simple terms, the anti-franking requirements impose an underpin test. At GMP Payment Date (being the date on which a member’s GMP comes into payment, which is typically 60 for women and 65 for men, or a date thereafter) it is necessary to test the member’s pension against the anti-franking minimum. Where the pension exceeds the anti-franking minimum at GMP Payment Date, no changes are required. Where the pension is too low, the pension must be uplifted to match the anti-franking minimum. In most cases, the underpin is unlikely to bite (and indeed many members will be excluded from the requirements to conduct the test) but where it does apply, it can have a significant impact on the benefits payable.
Anti-franking is a whole of service test so there is some uncertainty as to how it should be applied for members who commenced service before 17 May 1990. The guide highlights three possible options, citing the 'ring fence' technique as being the most appropriate starting point for schemes. This technique involves applying the anti-franking test to the member’s whole unequalised pension at GMP Payment Date before conducting an own/opposite sex comparison of benefits accrued in the 1990 – 1997 Equalisation Period only, applying anti-franking and revaluation to each in isolation as if they were the only benefits. Where the comparator would have received a higher benefit in the Equalisation Period, an uplift representing the difference is required.
The guidance also considers the later earnings addition element of the anti-franking test which is intended to prevent the late retirement factor on GMP being used to offset salary increases relating on non-GMP benefits for those members who remain in pensionable service after GMP Payment Date. This is a particular issue on GMP equalisation exercises as men have typically continued in pensionable service after age 60, meaning their opposite sex comparator’s pension will be subject to a later earnings addition.
Again, the guide contains worked examples for three fictitious members to demonstrate the potential impact of anti-franking on members.
Member communications
The September 2021 guide on communicating with members supplements the earlier August 2020 'Early Planning' communication guide. This edition focuses on the implementation stage and the key message is 'GMP equalisation may be very complicated but your communications don’t need to be'.
The guide sets out some very useful general principles for communicating with members, including:
- layer communications – keep the principal communication simple and put more detailed information in a separate place where those who would like to can access it, such as in a separate appendix or on a website;
- consider the most appropriate medium – could be different for different sections of the membership
- ask yourself what the individual needs / wants to know
- avoid technical jargon wherever possible
- involve other stakeholders in the drafting and agree an approach to how they will feed in from the outset;
- be trustworthy – use normal scheme letterhead / formatting to help members recognise this as a genuine scheme communication.
The guide makes clear that the member should be at the centre of the communications approach. Consider the GMP equalisation communication in context; what other communications might the member also be receiving from the scheme, and when. Sometimes holding off communicating until a point where the trustees are confident which members are affected and what the impact on them is likely to be will be the best approach.
Trustees and other stakeholders should be mindful of their legal obligations when it comes to communicating about GMP equalisation. For example, if conversion is being used as the means to equalise there are specific requirements in the legislation regarding consulting with and notifying members and survivors. Legal advice should be taken to ensure these requirements are met, particularly as not all of them are specific (e.g. 'in advance', 'reasonable steps').
The guide contains useful examples of the sort of wording you may wish to include in communications to different groups of members. Tailoring communications so they are relevant to different sections of the membership is very much favoured – each individual should receive information that is relevant and correct for them. This means it is important to understand and categorise your membership appropriately, so that their communications can then be tailored accordingly.
The importance of planning the production and mailing of the physical communication is noted. Good data makes for good communication, and early planning will make implementation much easier.
Takeaways for trustees and their advisers
- Trustees of transferring schemes should agree and document their procedure for correcting historic individual transfers from the scheme which should cover their approach to missing data, de minimis limits, tracing missing members and what to do where a top up payment cannot be made to the original receiving scheme;
- Trustees of receiving schemes should agree whether they will accept top up payments and, if so, the form in which any additional benefits will be provided;
- Schemes that adopt the D2 GMP conversion method of equalisation will need to agree which members will be included in the GMP conversion exercise and, specifically, whether deferreds will be included in a bulk one off exercise or if they will be left until retirement;
- Trustees should consider anti-franking and seek advice on this when implementing their GMP equalisation project;
- Trustees should put members at the centre of their communications approach, keeping main communications simple with further detail in a separate section for those who want it.
We are well placed to advise on GMP equalisation requirements in relation to pension schemes of all sizes. If you would like to explore this topic further, please contact Alice Honeywill or your usual member of our pensions team.