What is GMP equalisation?
The High Court in England ruled on 26 October 2018 that all Guaranteed Minimum Pension (GMP) benefits in UK pension plans must be equalised for males and females. The outcome of this judgement will affect any UK defined benefit scheme which has been contracted out of the State pension arrangements resulting in members of the scheme having a GMP. We believe that this means over 80% of UK defined benefit (DB) schemes are impacted.
The High Court judgement has resulted in a need to take action for both trustees and sponsors of DB schemes. It is Mercer’s view that this is a once in a lifetime opportunity for plan sponsors and trustees to work together to proactively manage the risks and complexities within their plan, reduce costs and improve member understanding of the benefits being delivered.
What does this actually mean for trustees and plan sponsors?
Trustees will need to take action to rectify the inequality, and there are a number of different methods available to achieve this. Depending on the method adopted, trustees and plan sponsors can have the ability to substantially reduce the complexity that has built up and perpetuated over 40 years. In order to do so, it will require close working between trustees, plan sponsors, administrators, actuarial advisors and legal advisors, along with clear communication with members. However, a successful outcome for the effective implementation of GMP equalisation could be simpler, equalised benefits that are better understood by recipients.
Analysis of preliminary actions taken or being considered by Mercer clients shows the majority of clients;
- have made an adjustment to cash equivalent transfer values to make allowance for equalising for the effects of GMPs; and
- are minded to simplify their scheme benefits by converting GMPs into normal scheme benefits.
Method of equalisation
Analysis of Mercer client discussions shows that around three-quarters of sponsors and trustees who have reached an initial view on how to equalise members’ benefits are planning the conversion of GMP benefits, thereby removing GMPs from their schemes entirely. Around one-in-six 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 has lost out on overall payments. 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.
Financial impact of equalisation
Given the increase in benefits that is due to members following the requirement to equalise GMPs, it has been necessary to include the additional cost of these benefits in pension accounting figures. For around 80% of schemes, the impact of implementing GMP equalisation is likely to be relatively small, equating to less than 1% of the schemes’ total liabilities. Nevertheless, for around 20% of schemes the impact is likely to be larger and, for a small proportion, the increase in liability is likely to be in excess of 3% of the scheme’s liabilities. The outcome for any scheme is dependent on scheme specific factors including the retirement age, the pension increases and the split of scheme members between males and females.
Whilst the scheme level impact may be small, the impact may be much more significant at the member level.
Implementing a GMP equalisation solution is a multi-stage journey, with several stages and dependencies. As one of the market leaders in advising UK DB schemes, Mercer is able to:
- lead trustees and sponsors through the decision making process using our well defined consulting process;
- highlight the advantages and disadvantages of the different approaches and quantify the financial and non-financial impact of the alternatives, and
- implement any of the alternative solutions in a streamlined and efficient way.