On 18 April 2019, the DWP published guidance on how schemes can use GMP conversion legislation to comply with their equalisation duties in respect of GMPs.
The guidance provides a useful summary of the steps which need to be followed when using the conversion legislation to effect GMP equalisation. However, it also highlights some significant issues with the current wording of the legislation (particularly regarding which employer(s) are required to consent to the conversion process) and that complex issues can still arise, particularly where pensioners or active members are concerned.
The landmark judgment in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc in October 2018 confirmed that pension schemes are required to equalise benefits for men and women to offset the inequality that results from GMP legislation. (For more detail, see our previous e-bulletin). The judgment clarified that there is more than one method which can lawfully be used to achieve GMP equalisation. One method (which requires employer consent) is to use existing legislation which allows GMPs to be converted into non-GMP benefits. Equalisation is achieved by calculating the actuarial value of the benefits (before equalisation) then taking the higher of the benefit value for a man and a woman and using that for the conversion process. For many employers, it is likely to be their preferred equalisation method due to its "one off" nature.
The conversion legislation:
- provides that post-conversion benefits must be of at least equal actuarial value to the pre-conversion benefits;
- does not allow defined benefits to be converted into money purchase benefits;
- stipulates certain minimum benefits to be provided for a deceased member's surviving spouse/civil partner; and
- does not allow the reduction of pensions in payment.
What does the guidance say?
The guidance sets out the key steps in the conversion process and highlights issues which may arise if trustees use the conversion legislation to effect GMP equalisation. It says that the Government is considering changes to the legislation to clarify certain issues, but does not specify which issues are likely to be clarified. Some key points of note are:
- the legislation requires the scheme's "employer" to consent to GMP conversion in advance, but where the scheme's participating employers have changed over the years, it may not be clear whose consent is needed in order to meet this requirement;
- GMP equalisation measures may have tax consequences. The guidance says that discussions are ongoing with HMRC regarding the lifetime allowance, protections against the lifetime allowance (and other tax protections), the annual allowance, lump sum payments, and transfers;
- the guidance suggests Trustees may wish to take advice in relation to members for whom the estimated cost of calculating and implementing equalisation is the same or greater than the projected additional benefits to which the member would be entitled as a result of equalisation. (This "de minimis" issue could possibly be the subject of a future hearing in the Lloyds Bank case);
- it is possible to convert GMPs for some members and not others. However, where a member's GMP is converted, the process will convert the whole of his GMP (ie including GMP accrued before 17 May 1990, the date of the Barber judgment which held that pension benefits for men and women should be equal);
- conversion legislation stipulates minimum benefits for surviving spouses and civil partners, broadly by requiring a pension equal to at least half the value of the pension to which the deceased member would have been entitled;
- regarding the requirement to consult members pre-conversion, the guidance says consultation should be "at a high level" and that, when seeking to contact a member, trustees should take the usual steps a trustee would take when required to provide information under pensions disclosure of information regulations;
- to calculate the value of benefits, the assumptions used for calculating cash equivalent transfer values will often be acceptable, but trustees should take actuarial advice and "Careful consideration should be given to any assumptions which are not unisex." Particular complications arise in relation to conversion for active members, and the guidance suggests trustees may choose not to convert such members until they are no longer in pensionable service; and
- conversion in relation to pensioners is also complicated because (a) there will often be insufficient data to establish directly their benefits on leaving pensionable service; and (b) the conversion process itself deals with future benefits and not the issue of how arrears due as a result of equalisation measures should be dealt with.
The guidance is helpful in summarising the conversion process and highlighting issues that trustees are likely to face. However, there are some issues which we think can only be resolved by changes to the legislation itself, in particular the ambiguity over which employer(s) are required to give their consent. The current requirements of the legislation regarding provision of survivor benefits can also be an issue, particularly where a scheme's existing benefit structure does not currently provide for a survivor's pension on the excess over GMP. The news that the Government is considering changes to the legislation to clarify certain issues is therefore welcome, as is the confirmation that HMRC is engaging with the potential tax consequences of GMP equalisation measures. Given that we expect to see further developments in this area, and for many members any uplift to their benefits in consequence of GMP equalisation is likely to be relatively small, we think that in many cases trustees would be well advised to await further developments before taking equalisation measures.