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The Actuary The magazine of the Institute & Faculty of Actuaries

Pension industry split on how to deal with GMP equalisation

The pension industry is split on how to deal with guaranteed minimum pensions (GMP) equalisation following a landmark ruling that could add billions to UK schemes’ liabilities.

GMP equalisation "could take years" ©iStock
GMP equalisation "could take years" ©iStock

The High Court ruled last month that benefits for members who had contracted out of the top-up state earnings-related pension scheme must be recalculated to reflect retirement ages in the 1990s.

It is thought that this could hit the profits of UK companies by £32bn, with up to eight in 10 of schemes’ employers forced to report the cost of GMP equalisation in their company accounts.

After polling 500 pension experts, Aon found that half favour a ‘dual approach’ when dealing with the problem, while slightly more than a third said they would prefer ‘conversion’.

Aon said conversion is attractive as it does away with GMP complexity, but can “create winners and losers” as the assumptions involved won’t be right for every member.

Dual records mostly avoid this problem, according to the firm’s principal consultant, Tom Yorath, but he warned that this comes with a heavy administrative burden.

“It’s no wonder given the complexity of GMP equalisation that there is some divergence in opinion on the way to go about dealing with it,” he said. “Both approaches have pros and cons.

“However, as tempting at it is to jump to an answer on which method to use, schemes have a big preparation job to do first which will be needed whichever approach is taken.”

While trustees seek legal and actuarial advice on how to deal with GMP equalisation, Aegon warned against delaying transfers from defined benefit to defined contribution schemes.

The insurance firm also urged the Pensions Regulator to clarify how it expects trustees to respond to transfer value requests, with GMP equalisation set to take “months if not years”.

“GMP equalisation won’t reduce anyone’s entitlement, so trustees shouldn’t need to delay quoting or paying transfers for fear of overpayment,” Aegon pensions director, Steven Cameron, said.

“The most common sense solution is to proceed on the current basis and to make a second installment where future calculations show the transfer value paid understated the member’s entitlement.”

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