GMP equalisation in transfer values

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We’ve been allowing for guaranteed minimum pension (GMP) equalisation in transfer values since the start of 2019, which makes us one of the first firms to do so. However, this hasn’t been a unilateral decision implemented across all our clients. 

Our approach is to consider the specifics of each scheme, only implementing GMP equalisation in transfer values where appropriate and agreed by the trustees. This has been a relatively painless process, having set up our systems capability at the end of 2018. 

Our quick turnaround in equalising our transfer value bases has ensured that members receive the full transfer value to which they are entitled, with minimum inconvenience for them.

One of our earliest implementations of an equalised transfer value basis took place on 1 January 2019 after the scheme’s trustees agreed to Barnett Waddingham’s recommendations in late November 2018.  This scheme has over £600m of non-pensioner liabilities and around 4,000 non-pensioner members.

Background

The Lloyds case gave a fairly resounding confirmation that defined benefit (DB) pension schemes must allow for guaranteed minimum pension (GMP) equalisation.

The author’s view is that trustees and companies willing to grasp the nettle could successfully implement GMP equalisation within the existing legislative framework and conversion is likely to be the best solution for both trustees and companies. This would avoid further delay in awarding the uplifts to which members are entitled. However, it is understandable that many trustees are not pressing ahead, with some citing that they are waiting for further clarity from the DWP (guidance now received) and subsequent rulings.

Transfer values on the other hand, are of more pressing concern. Paying a transfer value crystallises a member’s benefit within the scheme and trustees do not have the luxury of waiting for further clarity on the issue.

The majority of lawyers we speak to would like trustees to amend their transfer value basis now, to reflect the effects of GMP equalisation, but have found that either trustees or their advisers are not ready to do this.  As a temporary solution, transfer values are being paid without an allowance for GMP equalisation, with this being deemed a partial transfer value with the promise of a top up for GMP equalisation at a future date. Given the weight of legal view, I have no doubt that this is a legally permissible option, it just doesn’t seem ideal from either the trustees’ perspective, or perhaps more importantly, the members’. The prospect of having to make subsequent payments, only a few percent of the original transfer values, several years later will have practical issues and incur additional costs.

Allowing for GMP equalisation in transfer values now seems the more attractive option. Whilst there is the possibility that a subsequent legal ruling or guidance could require the transfer value method to be revisited, the likelihood of this seems low if good actuarial advice is taken and legal confirmation that a statutory discharge can be given to the Scheme when transfer values are taken.