1,001 reasons to equalise GMP

Topic:

Hot topic

Date published:

Tuesday, 29 November 2022

Author:

Kirsty Furze

Ok, I’m exaggerating a little. Even I can’t get to 1,001, but I can think of quite a lot!

I know many pension trustees have put reconciling guaranteed minimum pensions (GMPs) in the ‘not just now’ box, thinking it will be too painful to do. It doesn’t have to be like that though. As one of our clients said recently, “Thanks to PSGS, GMP equalisation has been ‘just a process’.”

Even if it isn’t such a simple process for your pension scheme, I can assure you any challenges you face equalising GMPs will save a great deal of pain (and cost) later. One of the reasons to equalise now is the impact not doing so has on future pension scheme projects.

A bit of work now = much less pain in future

As Claire Teagle highlighted in her ‘Are we ready for the buy in/buy out boom?’ blog, many pension trustees have found their schemes much closer than expected to achieving their end game objective. To complete a buy out, for example, you’ll need to equalise GMPs at some stage. To complete one smoothly and efficiently, you want to have equalised first.

I’ve heard all sorts of buy in/buy out war stories, but I’ll share one I think highlights the issues well. The initial buy in for this defined benefit (DB) scheme happened five years ago. Work started on the final ‘true up’ of scheme data but was paused in 2019 to complete the GMP reconciliation and equalisation work.

Each insurer is different but, in this case, they wanted all data reconciled to within 5p. Now that’s a challenge at the best of times, but even more so when you’re trying to agree GMP figures with HMRC and work through equalisation at the same time! The pension scheme trustees eventually negotiated with the insurer for them to agree the trustee adviser’s methodology for rounding, but this took a long time to achieve.

For this pension scheme, data for many members could then be reconciled and agreed, but there were about 60 cases with major data issues and all involved GMP. As well as hampering the ‘truing up’ of data for the buy in, GMP equalisation issues also delayed a pension increase exchange (PIE) exercise for this scheme, potentially hindering the success of the project for the scheme’s sponsor.

I’ve also seen difficulties with GMPs impacting enhanced transfer value (ETV) exercises. Until everything’s reconciled, members are unlikely to consider transferring. Indeed, a delay in agreeing GMPs can have a big effect on take up – market could conditions change and the ETV offered may not look so appealing.

There’s a lot pension trustees can learn from this – make sure you know what your insurer’s process is for truing up data, time and costs involved with a pension project could easily run away from you, understand if you have any key man risk in your adviser or administration team, a good strong relationship with your sponsor is vital… Most important though is just go for it and equalise GMPs now. (Take a look at James Double’s ‘4 top tips to help you manage GMP equalisation’ for some help.)

And while I think about top tips…

The way you communicate with members is crucial in any exercise, be that GMP reconciliation/equalisation, liability management or other projects. It’s just as important to think about how your pension scheme and its benefits have been communicated in the past. For example, if members were told their scheme offered a ‘golden pension’ by their employer, communicating an ETV exercise to achieve a high take up may be even tougher than you initially thought!

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