GMP Equalisation: Next steps for pension schemes and employers
The High Court judgment in the Lloyds case has confirmed overall pension benefits need to be adjusted to remove inequality in Guaranteed Minimum Pensions. This will mean higher benefits and increased costs for employers. While it will take many months and years to allow for this, employers are required to recognise the cost now.
We summarise how employers can avoid overestimates and play an active role in ensuring the lowest possible cost while removing complexity for good.
At a glance
It has taken 28 years and the judgment in the Lloyds case to confirm that overall pension benefits must be improved to remove Guaranteed Minimum Pension (GMP) inequalities between men and women.
This means higher benefits for some members and therefore higher costs.
Companies and trustees now need to work together to allow for this. Suitable methods differ in terms of cost and complexity. Helpfully these include one method to simplify benefits by removing GMPs – but employer consent is needed.
This cost will need to be allowed for in the next accounts and is likely to be charged to P&L. It will be important to avoid overestimates.
Pragmatism is needed for funding valuations – for most schemes the impact will be manageable.
View XPS Express PDF here
Possible accounting treatment
Broad estimates commonly put equalisation costs at 1% to 3% of total pension liabilities. But in practice we have seen schemes where the impact is lower than 1%
What is the cost?
Not all GMP equalisation methods are equal
The case looked at a number of methods (called methods A to D). The D methods provide equivalent actuarial value. D2 removes GMPs altogether and employer consent is needed. This will prevent unnecessary future costs.
Actions employers can take
For those schemes with GMPs there are three short-term actions you can take.
1. Engage with your trustees to set out your initial thoughts on equalisation method in order to minimise cost and ensure you obtain the best outcome.
2. Obtain the high-level data required to calculate a robust estimate of your accounting charge quickly.
3. Armed with the above, agree treatment with your auditor.
A silver lining?
Exploring the opportunity to remove your GMPs once and for all can create the opportunity to simplify benefits and reduce future administration and long-term exit costs.
Whilst clearly unwelcome news for employers from a cost perspective, is the silver lining the opportunity to embrace the change and remove GMPs once and for all?
GMP conversion and benefit simplification will allow employers and trustees to avoid unnecessary ongoing administration burdens and cost.
We are working with our clients using our XPS GMP Cost Calculator, a model we have developed to provide initial pragmatic accounting estimates so please get in touch with us as we can help you understand and manage this now.