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Many schemes will have begun to deal with some of the short-term issues around guaranteed minimum pension (GMP) equalisation. They will have considered the allowances to make in their funding and in transfer values and trivial commutation options.
The bigger, long-term issue that needs to be addressed is how schemes will adjust the benefits for their members and operate the scheme with those adjustments in place.
There are few that have yet taken the first step of that particular journey and for a number of perfectly understandable reasons.
1) Preparation is the key
Pensions – and GMPs in particular – are never as straightforward as we might like them. To be ready for GMP equalisation, schemes not only need to get their data in order, but will need actuarial advice on the practicalities and costs of different methods and specific legal advice on the benefits that might have been paid to the different sexes.
2) First movers don’t always prosper
This is a fast-developing area of practice. Many schemes will fear being the first to equalise in case further guidance or rulings later emerge.
3) Inadvertent cross-subsidy
There is also the very real fear that a scheme may pay more in order to get an adviser or third-party administrator (TPA) up to speed with their systems or processes. That investment won’t be recouped and, because it is standard across the industry, other schemes will benefit from your largesse.
"There is an alternative to equalisation that we believe will prove highly suitable for many schemes."
Blessed be the number crunchers
The move to equalise will also be primarily governed by the capabilities of schemes’ administrators.
Few TPAs are expected to be capable of administering equalisation until 2021. A number of systems are used across many different providers. Some of these are old and inflexible, and implementing GMP equalisation will require wholesale review of the administration system.
If your scheme is administered on an old platform that received little development resource, it could prove to be a painful process. Yet equalisation is one of those things that TPAs simply must deal with. Any administrator who fails to develop the capability to administer equalised benefits within the next two years will face extinction.
Schemes might benefit from keeping a watching brief on how their TPA is adapting to this new world to be satisfied that they will make it over the finish line.
Even if TPAs get up to speed on building the capability to administer equalised benefits, few will be able to carry out the implementation project itself. Schemes and trustees should consider outsourcing this work to a specialist adviser that can.
Forewarned is forearmed. Schemes that are aware of their providers’ capabilities – or deficiencies – will find they can keep their GMP project firmly on track.
An alternative to equalisation?
There is an alternative to equalisation that we believe could prove suitable for many schemes.
GMP conversion hasn’t been widely adopted due to the uncertainties that previously surrounded GMP equalisation.
If there is a silver lining to the Lloyds Bank judgement it is that the clarity provided on equalisation allows GMP conversion as a real alternative.
GMP equalisation is a detailed process that ultimately produces benefits that are more complex to administer each year. Whereas GMP conversion means going through a similar process but producing benefits that are simpler to administer and may be cheaper to insure.
Schemes with complex benefit structures, or those planning to buy out, will want to seriously consider conversion.