Government guidance on GMP equalisation and conversion

Just before Easter (18 April 2019), the DWP published its ‘guidance on the use of the Guaranteed Minimum Pension (GMP) conversion legislation’.

The publication of this guidance follows a landmark High Court decision, in which it was confirmed that pension scheme benefits must be equalised to allow for inequalities in GMPs. In coming to its decision, the Court ruled that GMP conversion is a lawful method of equalisation.

We reported on thiscase in November last year (see our update).

The DWP guidance has been produced with the assistance of an industry working group. It is intended to provide pension scheme trustees with a 10-stage process by which they can adjust benefits to allow for the effects of unequal GMPs, and then convert those benefits into ordinary scheme benefits.

The 10-stage process is intended to be a road map for trustees to ensure that they comply with the requirement to equalise GMPs in any conversion exercise. However, it emphasises that using the GMP conversion legislation is just one possible way to achieve equalisation, and that it is for the trustees of each scheme to decide the appropriate methodology for their scheme. 

Whilst the guidance provides some helpful clarification (see further below), some uncertainties remain. Trustees may still prefer to wait for some of those uncertainties to be resolved before taking any decisive action on GMP equalisation. Many schemes are still going through a process of ensuring that their GMP records have been reconciled with HMRC records and, where relevant, GMP payments have been rectified. 

Background to High Court decision

The judgmentconfirmed that pension schemes which provide GMPs must equalise benefits provided by the scheme in order to address the inequalities arising out of GMPs. GMPs themselves cannot be equalised as they are a product of legislation. 

GMPs are a historic legacy for schemes which contracted out of the additional state pension in any period between 6 April 1978 and 5 April 1997. GMPs are a problem because they accrue at different rates and are payable from different ages. Accordingly, the inequality in GMPs affects men and women differently at different points in time. 

The requirement to equalise pension scheme benefits stems from the Barber judgment in 1990, which ruled that benefits under an occupational pension scheme must be equalised as between men and women. That requirement applies in relation to pensionable service from 17 May 1990.  As such, the requirement to equalise GMPs relates to pensionable service from 17 May 1990 to 5 April 1997. 

The judge in this case considered different methodologies for equalising GMPs, split into four categories. The methodologies considered included equalisation based on the better of male or female comparator pensions each year (Method C) and completing a one-off calculation of actuarial equivalence (Method D).  A variation of Method D resulting in GMP conversion was also considered (Method D2). 

A supplemental judgment clarified that Method D2 already contains an equalisation mechanism and is a lawful means of converting GMPs without the need to apply equalisation under Method C2 first. This judgment also confirmed that it is for actuaries to determine the appropriate actuarial equivalents used in either method. 

The guidance

The guidance emphasises that there is no obligation to use this method, and that it is just one possible way to equalise benefits, as the High Court confirmed that a range of methodologies may be available.

The guidance gives a more detailed explanation of Method D2.  Broadly, the DWP method:

• places, for the purposes of equalisation, an actuarial value on benefits accruing between 17 May 1990 (the date of the Barber judgment) and 5 April 1997 (when GMP accrual ended);
• takes the higher of the value of a member’s benefits and the value it would have been had the member been of the opposite sex during the period; and
• converts this higher value into benefits that are no longer subject to the (unequal) requirements of the GMP legislation.

The 10-step process includes, amongst other points, guidance on reaching agreement with the employer; selecting the members and benefits to be converted; consulting with affected members; and the valuation process. 

A useful point to note from the guidance is that it is not necessary to convert the whole scheme in one exercise. The employer and trustees can in theory choose which group of members will have their benefits converted first (e.g. deferred and pensioner members). 

It is also worth noting that this is the ‘first edition’ of guidance on how the GMP conversion legislation might be used to resolve GMP equalisation. The government is looking to change the legislation in order to clarify certain (unspecified) issues, meaning that the guidance will also be updated from time to time.

Unanswered questions

The DWP guidance only considers GMP equalisation in the context of GMP conversion.  It does not provide answers to all the uncertainties still surrounding GMP equalisation. Areas where further guidance is needed include how to deal with members who have transferred out or died, and how to deal with DC schemes that have a GMP underpin. There are also some points that could helpfully be clarified, such as which employer needs to agree to the conversion, in circumstances where participating employers have changed over the years.  

In addition, the guidance confirms that a number of pensions tax issues may arise where GMP inequalities are addressed. HMRC has confirmed it is considering issues including the lifetime allowance; annual allowance; lifetime allowance protections, lump sum payments; and transfers, and is expected to provide its own guidance in the coming months.

Comment

Whilst the new guidance is helpful in relation to GMP conversion, it does not provide all the answers that trustees may have hoped for in the long-running issue of GMP equalisation. It is possible that more pieces of the puzzle will fall into place when HMRC publishes its guidance. In the meantime, trustees should consult their legal and actuarial advisers to decide whether they wish to take any action now or whether enough uncertainty remains that they prefer to wait for further developments.