25 July, 2019

United Kingdom, London

  • Pension schemes could use Guaranteed Minimum Pension (GMP) equalisation as an opportunity to simplify benefits and convert to (non-GMP) normal scheme benefit
  • Overall impact of GMP equalisation lower than expected, however individual member impact could be significant

London, 25 July 2019

Mercer supports the ‘Call to Action’ published by the Pensions Administration Standards Association(PASA) and highlights GMP equalisation as an opportunity for pensions schemes to simplify their benefits. In its announcement, PASA identified three initial areas where schemes can focus and urged trustees to start activity. Mercer welcomes the stance being taken by PASA and has developed a comprehensive set of materials and calculation tools to support clients through their GMP rectification and equalisation journey.

Adrian Hartshorn, Senior Partner at Mercer and Chair of Mercer’s GMP Equalisation Steering Committee, said, “The Call to Action published by the Pensions Administration Standards Association (PASA) is a timely prompt to trustees that, while some questions remain unanswered, a range of activities should be undertaken to support rectification and ultimately address inequalities in schemes’ GMPs."

Mr Hartshorn also highlighted the industry impact of GMP equalisation, noting; “Failing to correct for the effect of GMP equalisation means that members are being underpaid by around £100m - £200m per year. Retrospectively correcting this is already complex, and further delay merely increases that complexity.”

In line with the Court-approved methods Mercer announced that it has recently completed the first GMP implementation for a group of members in a client scheme. Christian Hardy, Senior Partner and Head of Trustee Services at Mercer, commented, “We are very pleased to have completed our first live case involving GMP equalisation and conversion. Careful project planning, stakeholder engagement and member communications were key to the successful outcome. We will now be able to apply lessons learned to benefit other clients.”

Emerging Trends

Analysis of the decisions being taken by Mercer clients (which number over 700 defined benefit schemes in total) showed that trustees and sponsors of pension schemes continue to form views on how to implement GMP equalisation, and in some areas have taken action, for example by forming project teams and undertaking benefit and data analysis to support future decision making. Many trustees and sponsors appear to be minded to simplify their scheme benefits by converting GMPs into normal scheme benefits. The expense and practicalities of implementing and administering equalisation are high on trustees’ list of concerns, as the impact at scheme level is usually expected to be very modest relative to a scheme’s existing liabilities whichever method of equalisation is chosen.

In particular, around 75% of sponsors and trustees who have reached an initial view on how to equalise members’ benefits plan to remove GMPs from their schemes entirely through a ‘GMP conversion’ exercise.  Around 20% are minded, instead, to leave GMPs alone but keep track of a member’s accumulated benefit payments and compare them with what the opposite sex would have received, to make sure no one loses out.  A smaller number are in wind-up and intending to make a one-off adjustment for members based on the difference in actuarial value of the member’s and their opposite sex’s expected benefits.

In terms of impact on funding (see figure 1 below), for around 80% of schemes, the impact of implementing GMP equalisation is relatively small, equating to less than 1% of the schemes’ total liabilities.  Nevertheless, for around 20% of schemes the impact is larger and in for a small proportion the increase in liability is in excess of 3% of the scheme’s liabilities. The outcome for any scheme depends on scheme-specific factors including the retirement age, the pension increases and the split of scheme members between male and female. However, while the impact at scheme level is small, at a member level impact may be much more significant.


Notes to Editors

Read more about GMP Equalisation here

1The October 2018 Court judgment confirmed that sponsors and trustees need to equalise the Guaranteed Minimum Pension (GMP) included with the pension benefits earned by members of most defined benefit pension schemes. GMP has remained unequal between men and women despite a more general requirement to equalise pension benefits that has been in place since May 1990. Since the Court judgement in October 2018, trustees and sponsors have been working through the initial issues, but in many cases progress has been slow. 

About Mercer

Mercer delivers advice and technology-driven solutions that help organizations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 23,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With 75,000 colleagues and annualized revenue approaching $17 billion through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit Follow Mercer on Twitter @Mercer. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority.


Figure 1

Source: Mercer, based on accounting impact.