Almost eight out of 10 trustees and sponsors expect to convert guaranteed minimum pension (GMPs) into other benefits as part of the equalisation process, according to new research.
Willis Towers Watson found that schemes going down the conversion route will typically get rid of all GMPs, not just those accrued in the period when male and female benefits must be equalised (May 17 1990 to April 5 1997).
A total of 78 per cent of trustees and sponsors expect to convert these benefits.
This ruling followed a high court case, brought by members of the Lloyds Banking Group pension scheme.
At the time many pension experts said this could involve a lengthy and costly conversion process for trustees, with relatively little benefit to members.
The Willis Towers Watson research found that almost six out of 10 trustees and sponsors (57 per cent) expect this equalisation process to take between one and two years to complete, with a further third (34 per cent) expecting it to take two to three years.
Only a tiny minority (4 per cent in both cases) expect this process to be done in less than a year, or take longer than three years.
However separate research from Aon suggests that the pension industry needs to step up its response to GMP equalisation to ensure that exercises are completed in the most timely and economical fashion.
Polling during a recent Aon webinar, showed that 75 per cent of participants had done an estimate of the liability increase caused by GMP equalisation, but only 5 per cent so far had a full project plan.
It also found that more schemes were favouring conversion – with 50 per cent of schemes surveyed favouring this method. However it says many are still planning to keep dual records with a cumulative total. This was selected by 39 per cent of schemes surveyed.
Willis Towers Watson says that where GMPs are converted the new benefits must be of equivalent actuarial value and pensions in payment cannot go down.
Rash Bhabra, managing director in Willis Towers Watson’s retirement business, says that there are three main reasons why schemes are looking seriously at conversion.
“First, converted benefits are simpler to administer and communicate. Schemes would not need to maintain ‘dual records’ comparing what a pensioner has actually received with what would have been due to someone of the opposite sex – so they do not have to wait for these administration systems to be up and running before implementing equalisation.
“Second, the unusual way in which GMPs increase, both before and after coming into payment, makes them difficult to hedge and more expensive to pass on to insurers. This is important when many schemes’ ultimate objective is to buy out.
“Finally, more straightforward benefit structures are easier to communicate to members and can provide more flexibility.”
She points out that GMPs have historically placed restrictions on options such as early retirement, tax-free cash and turning a small pension into a lump sum.
However she says some schemes may keep their GMPs, she says: “Some will prefer the administrative hassle of dual records to reshaping members’ benefits significantly without giving individuals a choice.”
Aon’s principal consultant Tom Yorath says: “It’s encouraging that schemes are getting to grips with GMP equalisation but there is still much work to be done. Schemes are rightly waiting for guidance from the likes of the DWP and HMRC before deciding on which method to adopt, but this shouldn’t get in the way of planning and preparation.”
He adds: ““On the whole, the responses we gained on the webinar reflected what we have been hearing directly from clients. Each method has its implications; conversion could deliver a big simplification prize – but is not easy to achieve. Method C2 – keeping dual records – is more administration-heavy but with potentially fewer side-effects for schemes to manage.”
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