GMP Equalisation: top 5 current issues

It is no one’s favourite topic but equalisation for the effects of GMPs is high on the agenda for most defined benefit pension schemes. With a lot of ground to cover in 2022/23, it seemed timely to set out what we are seeing as the top 5 current issues.

Past transfers-out: trustees are generally accepting that past transfers-out (back to 17 May 1990) will need to be adjusted and are commencing work to understand which members are affected, and looking at the associated data available. The Court in the Lloyds 3 case held that there was a distinction between statutory and non-statutory transfers, with the former having to be topped-up but the latter maybe not, because the member’s remedy is to have the transfer set aside and not recalculated. In practice, many schemes will not be able to distinguish between types of individual transfers and may need to take the same approach for all cases.

Other obvious issues to be addressed include how to deal with data gaps, how to trace and communicate with affected members, and how to settle the top-up liability (with a transfer top up being the ideal but some trustees are already accepting the possibility that ‘external’ cash payments may become a necessary alternative). Bulk transfers are different and, subject to any particular terms in the bulk transfer agreement, can probably be left undisturbed.

Discharge wording: the Lloyds judgment found that discharges signed on transferring-out are/were ineffective against member claims for incorrectly calculated transfers (i.e. where the correct calculation would have been based on an equalised GMP). We might extend this finding to ask why we bother with discharge forms at all? From a practical viewpoint, a carefully worded discharge will act as a first line of defence against future claims and might successfully apply to scenarios other than incorrectly calculated transfers. However, for now, we note that simply obtaining a discharge from a member does not necessarily mean there will not be a successful challenge.

Forfeiture: the Court held that there was no limitation period for claims for underpaid pension, but that a scheme’s forfeiture rule might apply to limit the period for which underpayments must be made good. Forfeiture rules take many forms, and will need to be considered on a case by case basis. However, as a general rule trustees might feel uncomfortable arguing that forfeiture rules which apply where a member has “failed to claim” a pension, or similar wording, apply to a case where a member did claim the pension but not a GMP equalisation uplift which they could not possibly have known about. The same judge as decided the Lloyds cases held in the recent Axminster Carpets case that “the first reaction of the Trustee should be to make good the earlier underpayments” in circumstances where “the beneficiaries were not in a position to know that they were being underpaid”. Depending on the circumstances of the scheme and the wording of the forfeiture rule, claims may not be limited to the last six years of underpayments. And if they are to be forfeit after six years, there needs to be an agreement with the sponsor about when the six years starts to run as time is ticking.

Setting off: can GMP equalisation uplifts be offset against overpayments, for example those which come to light as a result of GMP rectification? In principle, it is legally possible to offset a past underpayment against a past overpayment as long as that overpayment has not become an entitlement of the member. For the future it is less likely to be possible, as most schemes reduce the pension to the correct level once the overpayment is discovered. If the overpayment is to continue into the future, it becomes a record-keeping nightmare to administer the offset on an ongoing basis (especially for schemes using a dual-records approach to GMP equalisation).

In all cases, the offset requires precise calculations, to ensure that it is applied strictly to the overpayment only and does not eat into the pension the member is actually entitled to, because that is unlawful. There are also communication challenges in taking this approach, and a timing challenge if schemes are more advanced with their GMP rectification exercise than with GMP equalisation.

Benefit specification: before any detailed calculations are carried out in relation to GMP equalisation exercises, it is sensible to check that the basis on which the core benefits are provided in practice is consistent with the scheme rules. Scheme administrators will typically prepare a written benefit specification, describing how those core benefits are currently administered in practice, which is then reviewed by the scheme lawyers against the scheme rules. We would expect this to include normal, early and late retirement benefits (including equalisation of non-GMP benefits), increases to pensions in payment, revaluation of deferred benefits and spouse’s pensions on death in retirement and death in deferment.

If a GMP equalisation project includes members that left pensionable service many years ago, the correct benefit structure for those members may be contained in earlier versions of the scheme rules. It is important to identify at an early stage which scheme deeds and documents are likely to require review and, if any of those documents are missing, to start making enquiries with current and/or former stakeholders to locate them. Where bulk transfers of particular groups of members have been received into the scheme, it will be necessary to review the terms of the transfer agreement carefully, to make sure the correct benefit structure is being applied for those members.

On the horizon – GMP conversion

There is also a legislative development on the horizon in relation to GMP equalisation as the Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill is currently progressing through Parliament. Whilst this is a Private Members’ Bill, the Minister for Pensions and Financial Inclusion has confirmed that the government supports the Bill.

The Bill is intended to simplify and clarify certain aspects of the GMP conversion legislation. It makes amendments to clarify that the legislation applies to survivors as well as earners and it replaces the detailed requirements regarding the survivors’ benefits that must be provided by a converted scheme with a power to make regulations specifying the conditions that must be met in relation to such benefits. The Bill also replaces the requirement to obtain employer consent with a power to make regulations about who must consent to the conversion, to cover circumstances where a particular employer no longer exists. Finally, the Bill removes the requirement for schemes to notify HMRC that they have carried out a conversion exercise.

As well as the Bill needing to complete its journey through Parliament, in the case of the changes on survivors’ benefits and employer consent, regulations will need to be made setting out the detail of the requirements and this will be the subject of consultation. The progress of the Bill and the making of the regulations are developments that trustees considering using GMP conversion may wish to monitor.