The Government has published a consultation on various matters relating to contracting-out, including a proposed methodology for equalising GMPs.
The proposed equalisation methodology is the product of a working group comprising various pensions practitioners. The consultation states that the methodology is intended to be a suggestion of one equalisation method which the Government believes meets the equalisation objective derived from EU law, and the Government is not suggesting that the proposed methodology is the only way equalisation can be achieved.
The equalisation methodology is based on existing legislation which provides a mechanism for converting GMP benefits to non-GMP benefits. The consultation proposes that a capital value is placed on the member's benefits (both GMP and non-GMP) accrued up to 5 April 1997 (the date all GMP accrual ceased). This is then compared with what the value would be for an identical member of the opposite sex. The higher of the two amounts is the amount converted into non-GMP benefits on a basis that is gender neutral. The Government has agreed to make changes to existing GMP conversion legislation to address some difficulties which arise in relation to the current legislation.
The document setting out the proposed equalisation methodology itself acknowledges some potentially significant issues with the methodology proposed:
- the methodology is considerably more complex in relation to pensioners, requiring the pension and associated GMP to be "rolled back", in potentially a number of stages to when the individual left pensionable service. The effect of GMP inequalities is then examined through looking at the comparator's GMP from 17 May 1990 (the date from which the equalisation obligation arises) and projecting benefits forward to the conversion date, potentially in a number of stages;
- the process for pensioners only assesses the effect of GMP inequalities from the conversion date. However, inequalities before this date might mean either (a) that the pensioner has not actually lost out overall compared to a comparator of the opposite sex or (b) that the equalisation measures do not fully compensate the pensioner for GMP inequality;
- for pensions in payment, scheme administrators may only hold sufficient data to administer the benefits as currently in payment, not the more detailed data needed to carry out the equalisation measures proposed in the methodology;
- changes to actuarial factors over the years may have impacted amounts of benefit payable. To what extent should the methodology used attempt to take such changes into account?
- the result of applying the methodology to an active member could in some cases vary significantly depending on whether the calculations are carried out based on an assumption that the member has left at the conversion date.
The requirement to equalise GMPs derives from EU law. The consultation notes that the Brexit vote has raised questions over whether schemes will still be required to equalise benefits following a UK exit from the EU, but does not address this issue, instead simply confirming that the Government will continue to implement EU law whilst the UK remains a member of the EU.
Comment on proposed GMP equalisation methodology
In the absence of a compelling reason to address GMP equalisation urgently (eg if benefits are being secured via annuities), the right advice for most schemes is likely to be to wait at least until we know the outcome of the consultation.
Other contracting-out issues
Other issues (not related to GMP equalisation) covered in the consultation include:
- an amendment to a regulation dealing with revaluation following a transfer from one scheme to another, to make clear that the regulation only applies where the member's contracted-out service ended on the abolition date;
- provision to give HMRC discretion to accept late payments of contribution equivalent premiums (CEPs) where HMRC's GMP reconciliation exercise reveals that a CEP was not paid when it should have been;
- an amendment to make sure the statutory restriction on amending section 9(2B) rights operates to prevent a worsening of member or survivor benefits at an individual level;
- amendments consequent on changes to certain state bereavement benefits, to clarify the rules on survivor GMPs for those schemes that only provide survivor GMPs where strictly required to do so under the legislation. (In practice, many scheme rules provide for a survivor's GMP to be paid regardless of circumstances);
- a proposal that the fixed percentage rate to be used for fixed rate revaluation of GMPs will be 4% for early leavers from 6 April 2017;
- issues with the regulations which amended regulation 42 of the pre-abolition Occupational Pension Schemes (Contracting-out) Regulations 1996 which dealt with amending contracted-out rights. (It is possible that changes in this area may also result in changes to the regulations which now govern amendments to formerly contracted-out schemes);
- views are sought on whether there are any issues with the transitional arrangements which were put in place in relation to the end of contracting-out on a money purchase basis.
The consultation does not include changes to enable bulk transfers without consent to be made to a scheme that has never been contracted-out. The Government says it is working with stakeholders on this issue, but any changes to this aspect of the legislation will not be introduced before Autumn 2017.
The consultation runs until 15 January 2017.