Heywood Pension Tech
I started my pension career in 2005, 15 years after the 1990 Barber Judgement which required schemes to pay equal benefits to males and females. A further 15 years later it appears we may finally be coming to the end of equalisation. I have been part of the team reviewing the impact of GMP Equalisation on pension administration and designing the most appropriate solution. The key to the design has been to try and keep it simple with minimum impact on day-to-day administration.
The 2018 Lloyds High Court Ruling determined that GMPs require equalisation and the following four methods could be used:
B Dual records providing the better of male/female benefits on a year-by-year basis
C1 Dual records comparing cumulative male/female benefits before switching
C2 Dual record comparing cumulative benefits but including interest on earlier payment before switching (Default method)
D2 Converting GMP into equalised non-GMP benefits
Unfortunately, no equalisation method fits all. There is much for trustees and schemes to consider before determining the most appropriate method. Liability costs are often the main driver, but schemes are also keen to gain our thoughts on the impact on day-to-day administration and on their pensions admin system. A survey by the Association of Consulting Actuaries found that 43% of respondents were likely to use conversion with 31% likely to use dual records. The remainder were undecided.
We believe that opting for dual records, whether B; C1 or C2 methods will require greater system development than conversion, but the difference will normally be small in comparison to other impacts and resulting costs. More importantly, dual records will also impact administration with greater record keeping and additional complications to benefit calculations. However, by revising benefit calculations and processes, the administration pension impact of dual records should be minimal.
To reduce the administration impact, we aim to keep our solution simple where appropriate. The industry has tended to call Methods B & C as dual records, we prefer “Comparison Methods” as dual records can give the impression two full membership records are required, whereas only a small amount of a member’s data will need to be compared on a male and female basis.
Customers opting for comparison should look to automate calculations and processes so that the solution has little impact on standard administration but details of dual record data are available when required.
Other customers are hoping to simplify their benefit structure by converting and removing GMP, this is likely to require more upfront work but easier administration going forward.
All schemes have a similar end goal of equalising their member’s post-90 benefits, however, each scheme has varying obstacles in order to achieve this. Even before starting equalisation, complications have included:
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Lack of Tax Guidance for Conversion
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Extracting data, in particular, 90-97 benefits
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Assumptions to be made on member records
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Agreeing details of the current scheme benefits
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When to “switch GMP sex” and treatment of related arrears
Everyone’s understanding is evolving as we consider the details. Open communication lines and regular engagement is helping to ensure that schemes can understand how to overcome these obstacles. Crucial to producing the most appropriate administration solution is communication with our customers.
In answer to the question “can GMP Equalisation make pension admin simpler?”, the journey may be challenging but ultimately, I consider a successful GMP Equalisation implementation should mean that day-to-day pension administration is potentially simpler going forward.
Pensions are complicated and the landscape is constantly shifting. Luckily, Heywood is here to help. Our team of experts are on hand to help you with anything from regulations and implementation to data migration.
Jon Thorne is a Consultant and has worked for Heywood Pension Technologies for 15 years. His role is primarily concerned with supporting our corporate and central government customers with benefit calculations, defined contributions and administration processes.
