GMP equalisation and buy-ins
Equalising benefits, particularly for the effects of unequal Guaranteed Minimum Pensions (“GMP equalisation”) has, for some time, been a pre-condition for insurers converting a buy-in policy in the name of the trustees to individual policies in the name of members on buy-out. In other words, GMP equalisation is a necessary step before winding-up a pension scheme.
Before the decision in October 2018 in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc (“Lloyds Bank ”) the terms of a buy-in policy typically provided that the insurer had to be satisfied, often on the basis of legal and actuarial advice provided to the trustees, that benefits had been equalised in a way which met legal requirements. However, at that time the potentially complex administration associated with the methods of equalisation outlined in Lloyds Bank were unlikely to have been fully anticipated.
Trustees and insurers who entered into buy-in policies before Lloyds Bank will need to have a pragmatic discussion on how these terms should apply on moving to buy-out. In practice, those insurers who are still active in the buy-in market will in any case now be updating their practices to reflect the Lloyds Bank decision. However, those insurers who are no longer writing bulk annuity business may have less incentive to be accommodating.
Following Lloyds Bank, trustees who are negotiating a buy-in policy should seek, as far as possible, to maintain maximum flexibility to determine the method of equalisation, limited only by what is capable of administration. Most third-party administrators, and consequently the administrators available to insurers, are updating their systems to accommodate dual record keeping. However, to some extent this remains a moving target. The key will be to take steps now to ensure that the transition from buy-in to buy-out (even if this is not anticipated for many years) can be as smooth and flexible as possible for trustees.