The pension industry is split on how to deal with guaranteed minimum pensions (GMP) equalisation following a landmark ruling that could add billions to UK schemes’ liabilities.
The High Court ruled last month that benefits for members who had contracted out of the top-up state earnings-related pension scheme must be recalculated to reflect retirement ages in the 1990s.
It is thought that this could hit the profits of UK companies by £32bn, with up to eight in 10 of schemes’ employers forced to report the cost of GMP equalisation in their company accounts.
Aon has found evidence of the widespread interest in the issue and the clarity that pension schemes need to go about handling it. The consultant held a joint webinar on the subject with law firm Sackers, which drew over 500 attendees – a clear indication of the widespread interest in the issue and pension schemes’ need for clarity on how to go about handling it.
When polled during the webinar on what GMP equalisation method they would favour, 51% of respondents on the webinar said they favoured Method C – a dual record approach. However, showing that the industry needs to prepare for both approaches, 36% said they would favour Method D2, ‘Conversion’.
Aon said conversion is attractive as it does away with GMP complexity, but can “create winners and losers” as the assumptions involved won’t be right for every member.
Dual records mostly avoid this problem, according to the firm’s principal consultant, Tom Yorath, but he warned that this comes with a heavy administrative burden.
“It’s no wonder given the complexity of GMP equalisation that there is some divergence in opinion on the way to go about dealing with it,” he said. “Both approaches have pros and cons.
“However, as tempting at it is to jump to an answer on which method to use, schemes have a big preparation job to do first which will be needed whichever approach is taken.”
When asked what their biggest concerns with implementing GMP equalisation were, respondents showed more consensus, with 71% saying it was the cost and time involved in implementation.
Yorath said: "It's clear that pension schemes are keen to seek practical, pragmatic solutions and to manage the cost and time constraints."
He added: "As with any exercise such as this, good project management will be key to achieving what schemes need. Time is also on the industry's side, for while there are some immediate actions to take, much of the rest of the project can progress at a more measured pace.
"We would also hope that thinking can be shared across the industry so that the most efficient approaches can be followed from scheme to scheme."