Back in March, the cross-industry Guaranteed Minimum Pension (GMP) Equalisation Working Group issued guidance on GMP rectification. It outlines what trustees need to consider when combining GMP rectification with the GMP equalisation project, in light of the Lloyds judgment.
The guidance covers four key steps that trustees need to take:
1. Understand the data
a) The current position on the GMP reconciliation exercise
As GMP rectification is usually undertaken once GMP reconciliation is largely or fully complete, the guidance makes clear that trustees should therefore focus on completing GMP reconciliation. This will also ensure schemes have correct, accurate GMP information to carry out GMP rectification and equalisation.
The guidance suggests trustees ask their administrator to confirm the current status of the GMP reconciliation exercise, an estimated timescale for completion, and any details which the administrator may need from the trustee in order to complete reconciliation
b) Understanding the populations in scope for GMP rectification and equalisation projects
Understanding the populations groups is important in order to understand the potential for overlap for each exercise as well as the impact on members. In particular, how many members that are in scope for rectification are also in scope for GMP equalisation and how the approach to equalisation will impact the population of members that are in scope.
In addition, trustees should seek to understand the number of members in scope for GMP rectification that are active, deferred or pensioner members, which should be then broken down further to show those who have post 17 May 1990 GMP accrual.
The guidance notes that having visibility on the different groups and their population size will enable trustees to make appropriate decisions, avoid rework and ensure rectification and equalisation ‘dovetail’ with other scheme exercises such as pension increases.
c) Data needed for GMP rectification and equalisation
To help decide on when and how to progress with GMP rectification, trustees need to understand whether any significant data gaps that they may have, will be a barrier to GMP rectification.
2. Understanding the nature of the risk
When updating GMPs for non-pensioners, the guidance advises trustees to consider the wider needs of on-going administration and potential needs for the GMP equalisation project. For example some approaches will involve not just updating GMPs and pensions in excess of the GMP but also the National Insurance earnings history.
For pensioners and dependants, any change in GMP due to GMP reconciliation, may result in differences in deferred revaluation, in increases in payment and potentially also in anti-franking treatment. The guidance therefore details three approaches to rectify this including:
• Full re-administration to reconstruct the original administration calculations.
• Exchanging the change in GMP for non GMP at leaving date and using formulae to follow this through to the current date.
• Changing the constituent parts whilst leaving the overall pension unchanged with no past under or overpayments.
Similarly for non-pensioners, the data requirements for GMP equalisation can mean further contracting out data is needed to be added back onto the administration system.
3. Consider the impact on members of any delay
There is a need to consider the impact on particularly pensioners, of any delay. Trustees should therefore complete the rectification and implement the revised pensions as soon as possible for those pensioners who have no post 17 May 1990 GMP accrual.
For pensioners with post 17 May 1990 accrual and the GMP rectification calculation shows an overpayment which may need to be removed in whole or in part, or possibly adjusted upwards, trustees should discuss the actions to be taken regarding this group with their advisors.
4. Consider and document other factors influencing the timing of GMP rectification
Finally, the guidance lists a number of other considerations and factors that trustees should consider to show they have fulfilled their duty and can be seen to have taken an informed decision regarding GMP rectification. Trustees should, among other things:
- consider their duty to pay the right benefit to the right member at the time
- complete calculations to understand the impact on members before making decisions
- take into account any strategic projects such as current and future plans for any key scheme strategic activities
- plan the strategy for communicating with members, and
- assess the impact on costs of undertaking separate exercises or one combined projects.
The guidance notes that more information on how to rectify can be found on the PASA website.