Equalising for the effect of GMPs and transfer top-ups post Lloyds
The High Court’s decision in the first Lloyds Banking case finally clarified the need to equalise for the effect of GMPs. More recently, the same High Court judge concluded that trustees may owe a duty to pay a top-up in respect of past transfers which did not reflect the right to equalised benefits.
Trustees and employers with GMPs should therefore seek legal and actuarial advice on the implications of both cases and next steps.
What is unequal about GMPs?
From 6 April 1978 up to and including 5 April 1997, individuals could accrue an entitlement to an earnings-related addition to their basic state pension, called the State Earnings Related Pension Scheme (SERPS). An employer could contract its scheme out of SERPS if it was designed to provide a pension at least as good as a statutory minimum, known as the GMP. The GMP is a component of a member’s total scheme pension.
The method for calculating GMPs is set out in legislation and can result in inequality because:
- GMPs are payable from different ages (65 for men, 60 for women)
- GMPs accrue at different rates (with a female’s benefits accruing more quickly)
- different payment ages also create differences in the periods for which GMPs are subject to pre- and post-retirement increases
- revaluation of GMPs for deferred members is usually higher than that applicable to non-GMP excess benefits (in theory more favourable to women), and
- statutory increases on GMPs in payment tend to be lower than those under payable under scheme rules for non-GMP excess benefits (more favourable to men)
Whether other types of transfer are caught, such as a transfer under scheme rules or on a bulk basis, will boil down to a number of factors. For example, the drafting of scheme rules, whether the transfer was “mirror-image”, and any agreements reached at the time.
How we can help
- planning the GMP equalisation exercise
- helping pensions teams to answer questions from members
- considering options for GMP equalisation best suited to the scheme’s circumstances, including possible GMP conversion
- drafting changes to scheme rules to reflect the selected method
- advising on the potential for limiting backpayments
- considering the impact on any member or bulk scheme exercises (such as PIEs, buy-ins / out, closure and winding up)
- advising on lump sum payments and actuarial proposals for calculating transfer values on an interim basis, pending equalisation
- analysing past transfers to identify potential liability to pay a top-up and/or the likelihood of receiving one.