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Since 6 April 2009, it has been possible for schemes to convert members’ guaranteed minimum pensions (GMPs) into ordinary scheme benefits. (For background information on GMPs see, GMPs – Basics).
Before conversion can take place, five stringent conditions must be met. If they are, trustees will receive a statutory discharge from their responsibility to provide GMPs. The Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009 supplement these conditions by setting out how the GMP element is to be converted, on an actuarially equivalent basis, into new scheme benefits. They also outline the circumstances in which a survivor’s benefit must be payable from the converted benefits.
Condition 1: Post-conversion benefits must be "actuarially at least equivalent to the pre-conversion benefits". The responsibility for determining actuarial equivalence lies with the trustees.
Condition 2: Ensures that any member who was entitled to payment of a pension immediately before the conversion date must not receive a lower pension post-conversion.
Condition 3: Prevents the GMP being converted into defined contribution benefits.
Condition 4: Requires the same survivor's benefits to be attached to the post-conversion benefits as the pre-conversion benefits. (Broadly, half of all GMP rights must be used to provide a survivor's pension for a widow, widower or surviving civil partner.)
Condition 5: Focuses on procedural requirements. For example, trustees will have to take "all reasonable steps" to consult affected members before going ahead with a conversion (unless the scheme is winding-up). The sponsoring employer’s consent to conversion is also required.
The Pensions Regulator will have powers to require compliance with the conditions, or even to “unpick” the conversion in extreme cases. However, being a risk-based regulator, it will only consider using its powers in “very extreme” circumstances.