The government has this week launched a consultation on the methodology for equalisation of guaranteed minimum pensions, indicating commitment to the issue, which goes back to EU law, despite the Brexit vote.
GMP equalisation follows on from GMP reconciliation, which schemes were encouraged to carry out in response to the end of contracting-out.
They don’t really address the Brexit thing, but they say as far as they’re concerned, everything still proceeds as the UK is part of the European Union
Catrina Browne, Spence & Partners
The consultation follows the cessation of contracting-out in April this year and addresses draft amendments to contracting-out regulations, pensions legislation subject to review and proposes a methodology for equalising GMPs.
GMPs are remnants from the system of contracting out of the state earnings-related pension scheme. Employers paid GMPs to employees who were contracted out, and both paid lower national insurance contributions.
In 1990, the European Court of Justice ruled pensions were pay and had to be equal between men and women. However, GMPs were calculated on the assumption women retired earlier than men, and so accrued pension at a faster rate.
Schemes have time
Jon Hatchett, partner at consultancy Hymans Robertson, said schemes would have to carry out equalisation if they were planning to buy out their liabilities, but otherwise have a while to prepare.
He said: “Cleansing the scheme data and going through the reconciliation process will make it easier when this job comes around, and it seems likely it will. If they’re planning to buy out they’ll tend to do this as part of that.”
The EU legislation on which the consultation is based “isn’t going to be there post-Brexit, and then we probably have a few years of parliament being tied up with that”, he added.
Besides this, Hatchett said HM Revenue & Customs is still facing an eight-month backlog for dealing with GMP reconciliation exercises, which would have to be carried out ahead of equalisation.
He warned equalisation “will incur a lot of costs to schemes going through it, and add a bit to liabilities”, as where discrepancies were found, benefits would have to be averaged up.
Going ahead with GMP equalisation despite Brexit
Catrina Browne, administration consultant at Spence & Partners, said the consultation indicated an intention to press ahead with the EU-inspired law regardless of Brexit.
“They don’t really address the Brexit thing, but they say as far as they’re concerned, everything still proceeds as the UK is part of the European Union,” she said.
She added that the contents of the consultation were “no surprise”, but noted that some details are yet to be fleshed out.
“It’s not the perfect solution, but they’re giving us enough information,” she said.
Actuarial and legal advice is needed
Sally Minchella, senior consultant at Willis Towers Watson, agreed the consultation was “in line with what the industry was expecting”.
PPF: Don’t delay GMP reconciliation
With the end of contracting-out fast approaching, schemes have until 2018 to reconcile contracted-out liabilities, but they need to take action before April 5 2016.
However, she added it would be bad news for companies who "may have been hoping equalisation had been kicked into the long grass by Brexit”.
While potentially more work for schemes in the short term, Minchella said the proposals would decrease work in the longer term.
“GMPs are a big admin burden,” she said. “Part of the proposal is you normalise the GMPs and then turn them into a scheme benefit… they are turned into a pension of equivalent value, but they might have different increases.”
However, she added: “The actual process of going through this equalisation exercise will be a complex one-off project that will require actuarial advice, legal advice.”
