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The Actuary The magazine of the Institute & Faculty of Actuaries

PPF confirms approach to GMP equalisation

The guidance on the equalisation process, which confirms the use of the statutory minimum underpin method, will apply to all PPF schemes in assessment and all PPF members.

The lifeboat fund said the methodology will also apply to the Financial Assistance Scheme (FAS). FAS schemes in wind-up will be asked for data to help calculate assistance payments.

PPF executive director for financial risk, Martin Clarke (pictured), said: "We have deliberated long and hard on this complex issue, consulting with stakeholders, seeking expert advice and undertaking in-depth actuarial work.

"I would like to take this opportunity to thank all those in the industry who have provided us with invaluable help while developing this calculation method."

Alongside the announcement, the PPF published its response to the consultation on the calculation methodology which began in January.

Differences in compensation or assistance payments for men and women can arise because of differences in the calculation of guaranteed minimum pensions (GMPs) - primarily brought about by different retirement ages. In 2008, the PPF confirmed that it has to take account of GMPs to ensure the equal treatment of men and women that is required by law.

GMPs - background information

- Guaranteed minimum pensions are a defined benefit underpin broadly equal to SERPS (the State Earnings-Related Pension Scheme) which must be provided by schemes if they contracted out of SERPS in the relevant period.
- They were introduced with contracting out in 1978, and could accrue up to 5 April 1997 when contracting out arrangements were changed.
- Both defined benefit and (otherwise) defined contribution schemes could contract out and commit to pay GMPs.

GMPs (and SERPS) are unequal between men and women for two main reasons:
1. Women accrue the same GMP as men, but over a shorter period (to allow for different retirement ages) - thus the "accrual rate" of a woman's GMP is higher
2. Women are entitled to receive their GMP from age 60, men from age 65 (GMP age). If a member leaves service before GMP age, revaluation applies from that date until GMP age.

Rates of revaluation of GMP are different to rates of increase to GMP in payment (and often from the scheme's own revaluation and increase rates applying to the "excess over the GMP"). This will usually have the effect (depending upon movements in inflation) that benefits which are the same for a man and a woman at the date of leaving service will move apart by their retirement age.