PPF Consultation on GMP Equalisation: Sackers’ Response
Under section 171 of the Pensions Act 2004, the PPF Board has a duty to pay compensation on a basis that is no more or less favourable to a woman (or man) than it would be to a comparable man (or woman) in respect of pensionable service on or after 17 May 1990. The PPF Board received legal advice that, in meeting this requirement, it must take into account any differences in scheme benefits that have arisen due to differences in the calculation of GMPs for men and women.
The current consultation “On the calculation of PPF compensation and FAS assistance in the context of equalisation for schemes contracted-out on a GMP basis”, published on 24 January 2011, considers how PPF compensation and FAS assistance should be calculated for schemes which are contracted-out on a GMP basis. It follows the PPF’s first consultation (launched in April 2008), when the PPF Board considered a range of possible implementation methods. Having taken advice from Counsel, the PPF Board concluded that the most appropriate method for the treatment of GMPs for PPF compensation and FAS assistance is an “underpin approach”.
The consultation also promises guidance to help schemes which will be required to tackle GMP equalisation for these purposes.
In this response:
- General Comments
- Proposed treatment of GMPs
- Impact on schemes that qualify for the PPF
- Impact on FAS qualifying schemes
We consider that the underpin approach adopted by the PPF Board is a sensible one. Operating an underpin in this way reflects the nature of the GMP itself, allowing the overall benefit to be equal. It also reflects the approach to accrual of GMPs adopted in most scheme rules.
By contrast, an approach requiring the comparison of each tranche of members’ benefits could ultimately increase benefits and associated costs, as well as imposing an additional administrative burden. It is appropriate that the chosen method of calculation is not one which creates excessively generous benefits – a risk which was identified by respondents to the original consultation. We therefore welcome the fact that the PPF has taken on board earlier comments.
We also appreciate the PPF Board’s openness in sharing Counsel’s settled advice, which is very helpful for achieving a better understanding of the Board’s approach.
The consultation makes clear that the Board’s adopted approach only relates to equalisation of GMPs for the calculation of PPF compensation and FAS assistance.
We note therefore that the statement (at paragraph 2.2.1 of Appendix A) reporting Counsel’s advice that “Trustees of occupational schemes are obliged to equalise pensions payable insofar as GMP entitlements create inequality” should be read in this context.
Although schemes in the PPF will, generally, have been in wind-up for less time than their FAS counterparts, we consider that it will, to a certain extent, be necessary for the PPF to adopt a flexible and pragmatic approach in terms of its data requirements. This is because the availability of necessary data, and the costs involved in carrying out calculations, will vary significantly from scheme to scheme.
In terms of deciding which schemes in assessment would be required to apply the underpin approach themselves, and which would be adjusted by the PPF (Question 3.1), this will largely depend on how far through the PPF assessment period a scheme is when the requirement first applies. As indicated above, it will also depend on the state of the scheme’s records and the extent to which the data can be easily cleaned up. Applying the underpin will inevitably take time and involve extra cost (with any delays resulting from this process having a direct impact on the amount of funds available to transfer to the PPF). Other factors to be taken into account include the size of the scheme and the administrative and professional support available to it. Ultimately, where costs are incurred in resolving data points, this may result in a reduction in the assets available to the PPF to use to provide benefits. The approach taken should therefore recognise this and be proportionate. Consequently it would seem sensible for the PPF to assess schemes on a case by case basis.
Given the above, the proposed six-month time limit for implementing any changes is likely to be a difficult target to meet. We consider that it would be helpful to address in the guidance the need to balance what is achievable for schemes in whatever timescale is ultimately chosen, with the need to avoid incurring undue costs.
We agree that the underpin approach should not be compulsory for section 179 valuations (Question 3.5). Section 179 valuations are used for assessing the risk which a scheme poses to the PPF and are designed to be a simplified, approximate calculation. To require such calculations to take account of the potential impact of adopting the underpin approach would create an unnecessary burden.
Similarly, in relation to Question 3.6, we consider that requiring the actuary’s certification to encompass the potential impact of adopting the underpin approach on protected liabilities would be at odds with the simplified approach of section 179.
While good record keeping is an essential part of pension scheme governance, and campaigns within the industry (by TPR in particular) look set to improve standards generally, unfortunately it is not realistic to expect that all FAS schemes will be in a position to provide full GMP data. For many of these schemes, data may be missing or incomplete. Indeed it may not be possible to recreate such data, for example, as a result of records having been destroyed following the insolvency of the employer(s) in relation to the scheme, and due to the fact that FAS schemes may now have been in winding-up for many years. As such, for many FAS schemes it is likely to be difficult to provide the additional data going forwards (Question 4.2)
From this perspective, it is necessary, in our view, to distinguish the approach for FAS schemes from the position for those eligible for the PPF. We envisage that the PPF will need to recognise the limitations on FAS schemes, and adopt a pragmatic approach as to what data can be reasonably captured. Again, it makes sense for the position in each scheme to be reviewed on a case by case basis.
While Questions 4.3/4.4 are questions for actuarial experts, as noted above, given the likely state of much of the data coming across from FAS schemes, we consider that it would be sensible to allow the FAS Scheme Manager to make approximations when calculating the adjustment.