I am delighted to have published guidance with PASA on how GMP conversion is being used in practice to equalise for Guaranteed Minimum Pensions (GMPs).  GMP conversion is a powerful tool to achieve equalisation efficiently and avoid the complexity of other approaches.  However, it’s not the best option for everyone, and the guidance aims to help you understand what’s involved and whether it might be for you. 

Following the Lloyds judgment in 2018, pension scheme trustees need to choose a method to equalise benefits between men and women for GMPs.  The focus is on three methods described in the Lloyds case as methods B, C2 and D2.  The first two involve a year by year comparison of the member’s benefit with that of a notional comparator of the opposite sex.  The on-going administrative burden can therefore be high.  Method D2 on the other hand involves a one-off test and using GMP conversion to provide a new equalised benefit.  This is simpler in the long-term but involves a higher upfront cost. 

As we explain in the guidance, I expect GMP conversion is most likely to be used by 

• Schemes with complex benefits keen to simplify them; 
• Smaller schemes, particularly those seeking to buy out; 
• Schemes with a significant number of lower earners where GMP rules restrict member options; 
• Schemes where administration is undertaken in-house; 

• Schemes which already have an ‘at retirement’ Pension Increase Exchange (‘PIE’) option, a bridging pension option or are seeking to introduce them; and 
• Schemes where the additional complexity of operating the ‘year by year’ approaches (methods B, C1 and C2) on an ongoing basis would be particularly onerous. 

GMP conversion is less likely to be used by: 

• Schemes with straightforward benefits; 
• Larger schemes where the on-going costs of year by year administration can be spread over a wider membership; 

• Schemes with a large number of high earners; 
• Those averse to members and/or their survivors receiving more or less than they might otherwise have done under the year by year methodologies (as conversion normally involves using assumptions); and 
• Schemes unable or unwilling to meet the short term costs of the exercise. 

In my experience many schemes have characteristics in both the “most likely” and “less likely”.  In this case it’s a question of balance to choose what is right for your scheme. 

If you think GMP conversion might be right for you, two key points that are fundamental in my view are the nature of the benefits provided following conversion and the impact of pensions tax rules. 

In theory there is lots of flexibility in what benefits you provide following conversion.  You could provide something very similar to the existing pre-equalisation benefit.  You could provide something fundamentally different.  In my view it’s important to steer a path avoiding both extremes.  If you stick very closely to the existing benefits you risk inequalities between men and women re-emerging over time and failing to make any of the gains from simplification.  If you make too many changes you risk making fundamental changes to benefits out of all proportion to the inequalities you are trying to solve.  In the guidance we show examples of how schemes, including LCP clients, have found what I believe is a balanced way through. 

Another point not to underestimate is pensions tax.  Using GMP conversion can trigger disproportionate and unintuitive pensions tax issues.  Care is needed in choosing the timing of the conversion, who it applies to and the nature of the benefits provided.  For some there isn’t a significant issue but for others the impact or risk can be too high.  It would be great if HMRC could simplify the situation.  In the meantime the guidance provides examples of how careful planning and benefit design has the potential to address a number of the issues. 

I believe GMP conversion will be a really valuable tool for many schemes, but certainly not all.  Our team of experts can help you chart your course round the rocks and the whirlpools so that you can choose the equalisation method that is right for you and get back to focusing on your long-term journey.