Abolishing the LTA – will this open the door for bulk GMP conversion?
While I very much doubt that Jeremy Hunt considered the impact of abolishing the LTA on GMP equalisation and conversion, the ramifications of the recent Budget announcement could be fairly significant for GMP equalisation exercises and potentially bring the idea of bulk conversion (ie for all scheme members that have a GMP) back to the table.
Pensions tax has been a key area of consideration when schemes have been deciding whether to go for dual records or conversion and, in relation to conversion, whether there is any appetite to consider converting all GMPs in one fell swoop.
Clearly the decision to abolish the LTA is a big change in the world of pensions tax and the full ramifications (and changes to legislation) are yet to be worked through. A change in political party at the top could also bring about further changes / reversal of the current position.
But at this particular juncture, it’s interesting to look back at what the key issues have been for schemes that considered bulk conversion and what has now changed…
Loss of tax protections
One of the primary reasons for steering well clear of bulk conversion was to avoid inadvertent loss of tax protections (in particular, enhanced and fixed protection) due to the difficulties with how converting GMP interacts with the prohibition on benefit accrual above the “appropriate limit” (for EP) or increasing benefits by more than the “relevant percentage” (for FP) for non-pensioners.
However, the day after the Budget announcement was made to remove the LTA charge from 6 April 2023 and the LTA entirely from 6 April 2024, HMRC issued a newsletter confirming that members with enhanced or fixed protection “will be able to accrue new pension benefits, join new arrangements or transfer without losing this protection”. They will also keep their entitlement to a higher PCLS following the Budget news that the maximum PCLS will otherwise be frozen at £268,275.
So, all of a sudden, this particular barrier to bulk conversion seems to have fallen away…
The annual allowance / DMCO issue
The LTA may be disappearing but we still have the annual allowance, albeit rising to £60,000. The other key tax issue with GMP bulk conversion relates to the “deferred member carve out” (DMCO) for members who left pensionable service from 6 April 2006 onwards as the mere act of conversion could lead to a “pension input”.
However, there could be an avenue to be explored further as to whether the GMP tranche of benefit constitutes a separate pre-2006 “arrangement” for pensions tax purposes such that conversion of these benefits on an actuarially neutral basis does not cause a post-2006 leaver to fall foul of the DMCO restrictions.
Alternatively, there is some promise of further HMRC guidance on the particular issue as the 2022 newsletter recognised the problem and stated the need “to undertake further work in this area to determine the appropriate outcome and treatment, and the potential for any legislative change”.
“Winners and losers”
When schemes carry out GMP conversion, the actuary needs to make certain assumptions in order to calculate the post-conversion benefits and provide a certificate of actuarial equivalence. Trustees have needed to consider the so-called “winners and losers” analysis given that assumptions are just that – actuaries can’t predict the future with certainty.
Speaking as a lawyer and not an actuary, making assumptions for deferred/active members is a whole different ball game to making assumptions about pensioner members, particularly for those who are a long way off retirement. So the “winners and losers” analysis and considerations for trustees is likely to be trickier and require greater focus in a bulk conversion scenario.
Having been through a number of exercises involving converting the GMP for pensioner members in one go but non-pensioner members “at retirement”, it will be interesting to see how things develop in the coming months following the changes to pensions tax, and whether the idea of bulk conversion for all scheme members is reignited.