Equalising pensions for the effect of GMPs – Sackers’ response to consultation
The DWP is consulting on draft regulations, legislative review and a proposed methodology for equalising pensions for the effect of GMPs.
In this response
- General comments
- The new approach
- Proposed changes to the GMP conversion legislation
- Protection for trustees
- Forthcoming legislation and guidance
We are mindful of various circumstances which may ultimately affect the legal position regarding the equalisation of GMPs, including the ongoing legal action brought by the Lloyds Trade Union and the possible future impact of Brexit on the UK’s discrimination legislation. However, we remain of the view that GMP equalisation is not required.
GMPs are designed to provide benefits that would otherwise be provided by the State. These State benefits are themselves different for men and women. While equalisation of State Pension Ages between men and women is underway, there is no intention to alter State benefits retrospectively and the historical rules remain unequal. Given that GMPs are in line with the applicable State benefits, we do not consider there to be justification for more onerous requirements to apply to GMPs than to the state benefits which they replace. Our full reasons for this view are set out in our response to the DWP’s consultation on this subject in 2012.
Due to the present uncertainty as to whether schemes are required to equalise pensions for the effect of GMPs, in practice schemes have deferred doing so. In our experience, it has generally only been schemes that are winding-up that have attempted to equalise. In our view, this uncertainty is likely to continue whilst the legislative position post-Brexit remains unclear and the outcome of the LTU action is outstanding. Unless and until there is a clear obligation on schemes to equalise pensions for the effect of GMPs, schemes are likely to continue to defer a decision to do so.
We question the DWP’s decision to apply a reduced period for responding to the present consultation, in particular given that the parallel consultation for public service pension schemes has been set for the standard 12 week period, and given the significant amount of time that has elapsed since this issue was first consulted on nearly five years ago.
In our response, we have focused our comments on the elements of the proposed method for equalising pensions for the effect of GMPs that are relevant to our practice, and have not sought to answer every question in the consultation.
The proposed new methodology seeks to achieve equal benefits in private sector pension schemes using a one-off calculation followed by GMP conversion. This proposal for a one-off conversion represents a significantly simpler solution than that offered by the original method put forward by the DWP for consultation in January 2012.
We recognise the Government’s intention that the proposed method is to be one option available to schemes for equalising pensions for the effect of GMPs, and that schemes will be free to choose alternative methods should they wish to do so. That said, some schemes wishing to use the Government’s method may find it difficult to do so if they have a restrictive power of amendment. It would therefore be helpful for schemes if the ability to use the Government’s method were supported by a carve-out from section 67 and a statutory mechanism to override scheme rules in these circumstances.
The consultation focuses on the position for DB schemes. However, the position of DC schemes with GMP underpins also needs to be considered.
The option to convert GMP benefits into ordinary scheme benefits was introduced in April 2009. However, in our experience, this facility has rarely been used to date, except occasionally for schemes in wind-up.
One reason for the low take-up of the facility is that strict conditions need to be complied with before GMP conversion can be achieved. For example, there is a requirement for the same survivors’ benefits to be attached to the post-conversion benefits as were attached to the GMP. This is quite different to the position for protected rights which have generally been converted into ordinary scheme benefits without any particular restrictions being imposed.
Allowing conversion of GMPs into ordinary scheme benefits for both earners and survivors using a simplified procedure represents a viable alternative to the DWP’s original, costly and complex, proposal for equalising GMPs.
Definition of GMP conversion
We agree with the proposal to extend the definition of GMP conversion in section 24A(1)(b) to include survivors’ benefits, as this would remove the need to track survivors’ benefits separately.
Replacing the consultation requirement
We also agree with the proposal to drop the requirement to consult with members as, in our experience, this served no clear purpose. Replacing this with a requirement to notify members is a more practical approach.
However, we question why there needs to be two sets of notification, ie before and after the conversion takes place. This could be dealt with in a single notice, ahead of the conversion, which announces the date from which the change will be made.
We recognise that other notification requirements will remain, such as the need to notify HMRC that conversion has taken place and note that this is one of the issues on the DWP’s list for further consideration.
Removal of restrictions on transfers
We also agree with the proposal to remove the existing ability for the Government to introduce restrictions on transfers under GMP converted schemes (section 24F(1)(a)).
As noted above, the proposed method for equalising pensions for the effect of GMPs is one option, and it is intended that schemes will be free to choose an alternative. However, what the proposals do not currently include is some form of protection for trustees who use the Government’s method.
Under section 24H of the PSA 1993, the Pensions Regulator has the power (which is not time limited) to unpick a conversion where it is of the view that the conditions of section 24B have not been satisfied. Insurance is often taken out by trustees seeking to mitigate the risk of this happening on winding-up. Trustees who follow the Government’s suggested method to equalise pensions for the effect of GMPs will have no certainty that their conversion is not at risk of being unpicked. A statutory discharge would help to address this issue.
We anticipate that there will be further consultation by the DWP on the detailed legislative changes needed should the present proposal be implemented.
We welcome the fact that the DWP intends to issue guidance to clarify some of the details of the GMP conversion process once the legislation has been amended. We note the DWP’s comment that it will not be possible to issue guidance until a legislative vehicle becomes available and the necessary changes to the primary legislation have taken place. However, we would welcome early sight of the draft guidance, which we feel would benefit from being considered in tandem with the draft legislation to ensure a consistent and considered approach.