Just before Easter, the DWP published its long-awaited guidance on GMP conversion. Since the High Court confirmed the need for schemes to equalise pensions for the effect of GMPs in the Lloyds Bank case in October last year, GMP conversion has been seen by many as the solution likely to be preferred by most schemes. However, attempts to use the GMP conversion legislation to simultaneously resolve the problem of GMP equalisation and at the same time simplify scheme benefits have been postponed pending the DWP’s guidance. So does this provide the silver bullet that schemes have been waiting for?
Not quite. Whilst the guidance provides some practical assistance for trustees, it leaves a lot of the tricky questions unanswered.
What does the guidance say?
Section 4 of the guidance sets out a 10 stage process for implementing GMP conversion, as follows:
- Trustees and scheme employer agree that conversion is to be used.
- Select members and benefits for conversion and the form of the new benefits.
- Set the conversion date.
- Consult affected members and survivors.
- Determine basis for valuing the benefits to be converted.
- Equalise benefits.
- Determine post conversion benefits.
- Actuary certifies that post conversion benefits are actuarially at least equivalent to pre-conversion benefits (no later than 3 months after calculations have been completed).
- Modify scheme to effect conversion.
- Notify affected members and survivors.
The guidance also highlights a number of legal and practical issues that will need to be considered as part of the process. This includes:
- deciding whether to convert the benefits of all members at the same time – the guidance makes clear that the legislation does not require trustees to convert the benefits of all members nor to convert them at the same time (this may be helpful, for example, in dealing with active members (see below));
- setting the assumptions to be used to value members’ benefits – trustees are responsible for setting the assumptions to be used to value members’ benefits as part of the conversion process, having taken advice from the scheme actuary. The guidance suggests that a scheme’s cash equivalent transfer value basis may be a suitable starting point for this. However, it notes that careful consideration will need to be given to the use of unisex factors (where a scheme’s CETV assumptions differ between male and female members), as this could otherwise result in the “equalised benefits” being different for males and females, which may be difficult to explain to members if trustees are ever called upon to do so;
- deciding how to deal with active members – for active members, trustees will need to decide whether to value their benefits as if they continue in service, leave immediately at the conversion date or using a more complex calculation involving a scale of assumed probabilities of members leaving pensionable service at different ages. Alternatively, trustees may wish to delay converting the benefits of active members until they actually leave pensionable service. Similar issues will arise in respect of members with a final salary link; and
- considering the interaction of conversion and the payment of arrears to pensioner members – as the guidance makes clear, GMP conversion only deals with the future; it does not address the issue of past underpayments to existing pensioners. Therefore, if trustees decide to convert the benefits of pensioner members, they will also need to determine the basis on which arrears of pensions will be equalised and the period in respect of which arrears of pension need to be paid, taking account of any forfeiture provision under their scheme’s rules. They may also need to consider how the payment of arrears interacts with the calculation of the post-conversion benefits. Similar considerations will apply to survivors in receipt of a scheme pension.
What does the guidance not say?
Whilst it provides a helpful summary of the conversion process and some of the key issues that will need to be considered, the guidance leaves a lot of questions unanswered, pointing trustees instead to their legal and actuarial advisers.
For example, the guidance does not express a view on:
- how the employer consent requirement operates where a scheme’s participating employers have changed over time,
- how the legislative requirements relating to post conversion survivors’ benefits should be applied, or
- how to deal with deficiencies in scheme data.
There is also no clear indication of when we can expect HMRC to confirm its view on the various tax issues associated with GMP conversion (and GMP equalisation more generally) or how pragmatic (or not) HMRC is likely to be.
The guidance also indicates that the DWP is considering changes to the GMP conversion legislation to clarify certain issues, but it does not identify the changes that are likely to be made or when any changes can be expected.
A silver bullet?
GMP conversion undoubtedly offers the chance to simplify scheme benefits and to address the issue of GMP equalisation in one go, avoiding the complexity and costs associated with running dual member records and conducting an annual equalisation exercise. This is likely to be attractive to many schemes and it may also help those looking to buy-out to distinguish themselves from the field.
However, as the guidance illustrates, the process itself is far from simple and a number of issues still need to be ironed out.
Therefore, for most schemes with their finger on the GMP conversion trigger, the safety catch will probably remain on until there is greater clarity on these points, unless there is a compelling reason to fire the starting gun.
However, that does not stop schemes loading the chamber by taking preparatory steps, such as:
- completing GMP reconciliation exercises
- preparing scheme data
- confirming administrative practices in relation to GMPs under their scheme
- obtaining initial legal and actuarial advice on the various approaches to equalisation, and
- discussing the practical and cost implications of the various options with their scheme administrator.