GMP equalisation – pity the poor trustees…

Estimated reading time: 3 minutes

Julie Walker, Associate, considers the problems trustees face after the Lloyds ruling.

A few weeks post-Lloyds and we’re taking the finer points of the ruling as read - lots to do, or not do, legal advice to take, or not take, transfer values to suspend, or not suspend – a catalogue of unknowns that are raising trustee frustration levels up and down the country.  

GMP equalisation was always going to be hard to relate to, it doesn’t really grab the imagination or lend itself particularly well to convenient metaphors - we’re calling it the ‘elephant in the room’ because, basically, it’s a large, poorly defined grey area and, sooner or later, the appeals and head scratching about where it came from is going to stop, and the real, practical, nuts and bolts discussions about how to deal with it will need to start.

Equalisation in context

The whole equalisation piece isn’t happening in a vacuum – on a scale of one to ‘a lot’, there was already A LOT of work to do around Guaranteed Minimum Pensions (GMP).  Closing in on the end of 2018, the entire administration industry, whether TPA, in-house, public or private sector, is working flat out to wrap up GMP reconciliation (7.5 million GMP members to reconcile, let’s remember) before HMRC largely shuts up shop on GMP support. Looking forward to 2019, when the equally challenging GMP rectification piece really kicks in, and slowing down already wasn’t an option.

Reconciliation vs rectification vs equalisation

There was already a fine line between GMP reconciliation and rectification, a line so fine that many schemes struggled to see the difference. Reconciliation, the detailed forensic comparison of almost four decades worth of scheme and HMRC records to establish every member’s precise GMP entitlement at a given point in time, is the theory side of contracting out. Rectification, the next and final step in the process, is the practical. 

Trying to put this in a more relatable context, let’s imagine you upgrade your bank account –

  • Reconciliation - your new bank charges £10 for making the switch, gathers up all your direct debit and standing order details, makes sure your mortgage and car payments all still get processed on time, income and outgoings all add up and overdraft charges are reasonable. Let’s call that reconciliation.
  • Rectification – now imagine you tell your new bank you want them to review every payment through your current account for the last forty years or so – regardless of who you banked with at the time, and you also want them to check the details on all those direct debits and standing orders and also just confirm whether you could have been getting a better deal elsewhere on utilities and insurance etc. Then tell them to put you and every other party you ever transacted with (or should have) in exactly the position you would have been in if you and they had done exactly the right/best thing at exactly the right time, every time. Let’s call that rectification and let’s acknowledge that that original £10 probably won’t cover it.
  • Equalisation – stretching the analogy, now imagine that a few weeks before you were about to get moving on rectification, having spent three years getting all your records in order, a legal judgement comes down that says at some point in the past (for an indeterminate period of between zero and 28 years) there was something very slightly not right with some obscure little aspect of how your interest or charges were calculated. Something (actually a range of potential somethings) may need to be done about it, or nothing much may happen at all. Most likely, the numbers involved are going to be marginal, but you won’t know until the work is done, and you don’t know if it’s even going to happen until the appeals are in. That’s GMP equalisation.

Can we do it? Well, yes we can.

We need to be realistic about where trustees are coming from. Ultimately, as the industry has tried hard to reassure schemes, GMP equalisation is completely ‘doable’, but the timing could certainly be better and the ‘GMP fatigue’ factor is real.  

Back in 2015, when the reconciliation ball really started rolling, trustees could buy into the idea that something probably needed to be done about their GMP. Fast forward to today, and trustees are tired of GMP – exhausted by three years of super-detailed discussions on the finer points of contracting-out regulations. Trying to engage schemes now in a second conversation around the super-niche subject of GMP equalisation is going to be a really tough sell.

This article was originally published in Professional Pensions.

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Head of GMP equalisation, John Cormell guides you through all the implications and discusses what the judgement means for trustees and sponsors.

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