GMP conversion guidance published: a good first step?
On 18 April 2019, the Department for Work and Pensions (DWP) published guidance on using the existing Guaranteed Minimum Pensions (GMPs) conversion legislation to remove inequalities introduced by GMPs. Legislation permitting GMPs to be converted into ordinary pension scheme benefits was introduced in 2009, but has been little used to date. However, last year’s Lloyds case has thrown a spotlight on a number of questions around how GMP conversion would operate in practice.
- The DWP has published guidance on using GMP conversion legislation to remove inequalities introduced by GMPs
- The guidance contains some helpful clarifications
- Benefits do not have to be converted for all members nor do they have to be converted at the same time
- However where an individual’s GMP is to be converted, all of the GMP and the associated excess must be converted
- The guidance gives details of how the required consultation with members could be carried out
- Some issues are still to be addressed including what the pensions tax implications (if any) of converting might be
Trustees and employers interested in using conversion should consider discussing next steps with their advisers
Legislation permitting GMPs to be converted into ordinary pension scheme benefits was introduced in 2009, but has been little used to date. However, last year’s Lloyds case has thrown a spotlight on a number of questions around how GMP conversion would operate in practice. The judge in the case confirmed that the Lloyds trustee is under a duty to remove inequalities introduced by GMPs (commonly known as equalising GMPs) and that GMP conversion was an acceptable method of equalisation.
The conversion guidance
The guidance sets out how schemes could use the existing GMP conversion legislation to equalise GMPs. It describes a way of equalising GMPs that the Government believes meets the legal obligation and notes that there may be other ways of doing this. It further states that the Government is considering changes to the GMP conversion legislation to clarify ‘certain issues’. The guidance will be updated from time to time if there are any changes to the legislation or to case law.
The guidance emphasises the importance of the trustees being satisfied that their GMP records are correct before equalising, noting that although HM Revenue & Customs’ (HMRC’s) scheme reconciliation service is now closed, its GMP checker service can still be used.
Need for an opposite sex comparator
The Government reiterates its view that the Allonby judgment means that GMPs should be equalised regardless of whether an opposite sex comparator exists. It further confirms that it will legislate to make changes to the Equality Act 2010 to reflect this ‘as soon as a suitable opportunity presents itself’.
Agreement with the employer
The legislation requires that ‘the employer in relation to the scheme’ agrees in advance to the conversion. The guidance clarifies that this consent extends to the terms on which the benefits are to be converted. Where participating employers have changed in the past, it states that legal advice should be taken on how/whether the consent requirement still applies.
Choosing which members and which benefits to convert
Helpfully, a number of points are clarified. Firstly benefits do not have to be converted for all members. Further the law allows conversion to be carried out in stages for different groups or individuals. Only GMP accrued between 17 May 1990 and 5 April 1997 needs to be equalised. However, if conversion is used to equalise an individual member’s GMP, then all of their GMP and the (excess) benefit that accrued alongside it need to be converted, although pre 17 May 1990 GMP (and associated excess) does not need to be reshaped. The benefits of individuals whose entire GMP was accrued before 17 May 1990 do not have to be converted if the only reason for conversion is to equalise GMPs.
Finally, the guidance states that ‘conversion could mean that for some members all or a significant proportion of their accrued benefits will be re-shaped… not just that relating to their 1990 to 1997 service’.
Choosing the form of post-conversion benefits
The guidance notes that there are some legislative constraints to the form of the post-conversion benefits including the survivor benefits. It contains a reminder that trustees are required to act in accordance with their fiduciary duties when converting and equalising benefits and when deciding on the shape and form of post-conversion benefits. It suggests that where post-conversion benefits are materially different in shape and form to pre-conversion benefits then trustees might wish to consider giving members options (and possibly also consider if any of the Code of Practice for Incentive Exercises is relevant).
The legislation requires that the trustees must ‘take all reasonable steps’ to consult the earner before the conversion takes place, but gives limited details. Further, there are requirements as to the notifications that must be made to members and survivors affected by the conversion.
When seeking to meet the member consultation and notification requirements in the GMP conversion legislation, the guidance indicates that the steps trustees should take to trace members are the same as the steps they would take when required to provide information by the Disclosure regulations. Our view is that to ensure an adequate consultation/member engagement with any new options trustees might want to consider tracing members.
Choosing the basis for actuarial valuation
The legislation requires that the post-conversion benefits must be at least actuarially equivalent to the pre-conversion benefits. Whilst it does require that trustees take advice on assumptions from the scheme actuary, it does not prescribe what assumptions should be used by the trustees. The guidance warns trustees that the choice of approach may have a substantial impact on some members’ benefits (particularly where they are subject to different increases before and after conversion). The basis used for transfer values (with no reduction for any deficit) will often be an acceptable starting point.
The guidance also states that ‘careful consideration’ should be given to any assumptions that are not unisex.
Finally the guidance considers the issue of members whose benefits are linked to salary whilst they remain in pensionable service/employment (including but not limited to active members). It sets out a number of possible assumptions trustees could use. It also suggests that trustees might wish to delay converting such members until the salary link is broken.
Although the GMP might be known, the proportion of it that needs to be equalised might not be, in which case a sensible approximation can be used in the vast majority of cases. Trustees might need to take legal advice on other, more significant data issues.
Tax issues arising from GMP equalisation
The guidance notes that a number of possible tax issues could arise in connection with GMP equalisation. It goes on to state that HMRC are considering issues affecting the lifetime and annual allowances, lump sum payments, transfers out and various protections. It is not currently clear when a response from HMRC will be available.
Other issues not addressed by the guidance
On several known areas of uncertainty, such as whether GMP equalisation needs to be carried out for members who have transferred out or died, or in respect of transferred-in benefits, the guidance suggests that trustees might want to take legal advice. The guidance also suggests that trustees take advice on members for whom the cost of equalising GMPs is either the same or more than the value of the uplifts expected to result from GMP equalisation.
Whilst the guidance does contain some useful clarifications, a number of key points remain unresolved. In particular it is not clear when the DWP might legislate to address issues with the GMP conversion legislation or how HMRC might address the various issues around GMP conversion and pensions taxation. Even if trustees decide not to press ahead now with GMP conversion, it is possible to start preparing and planning for conversion e.g. tracing members for consultation.