55: PASA publishes GMP conversion guidance
The GMP equalisation working group (the GMPEWG) chaired by PASA published its guidance on GMP conversion on 9 July 2021 (the guidance). The guidance explores how schemes might carry out GMP conversion ‘in a proportionate and pragmatic way in the absence of further guidance or legislation from DWP and HMRC’ and outlines approaches to GMP conversion that ‘the authors are aware either have been adopted or are actively being considered by early adopters’.
The detail of the GMP conversion requirements is set out in the Pension Schemes Act 1993. It was introduced on 6 April 2009 in order to remove complex administrative and legislative GMP requirements and to make benefits easier for members to understand.
Schemes have to adjust benefits for the unequal effect of GMP following the decision in the Lloyds Bank Case. The obligation applies to GMP accrued from 17 May 1990 to 5 April 1997. GMP conversion (method D2) was approved by Lloyds as a method for implementing GMP equalisation and the guidance follows a number of other guidance notes issued by the GMPEWG on the topic of GMP equalisation.
Schemes seeking to implement GMP equalisation can also find guidance from HMRC on GMP conversion (February 2020), tax issues relating to GMP equalisation (April 2020) and the payment of lump sums (July 2020) but a number of key questions remain relating to the use of GMP conversion in order to adjust benefits for the unequal effect of GMP. The guidance notes throughout that schemes should take legal advice on the GMP conversion legislation and a number of outstanding issues.
The guidance sets out that GMP conversion is a decision made by trustees and sponsoring employers and requires the input of the actuary, lawyers, administrators and consultation with members. It sets out the basic conditions for conversion: (i) the post-conversion benefits must be at least of actuarial equivalence to the pre-conversion benefits; (ii) pensions in payment must not be reduced; (iii) schemes cannot switch to defined contribution benefits; (iv) there are minimum contingent survivor benefits; and (v) there are a number of procedural requirements, including employer consent, member consultation and member and HMRC notification.
Purpose and schemes most likely
The guidance briefly describes some of the benefits of GMP conversion, such as simplified benefit structures which can improve member understanding and reduce administration costs as well as potentially reducing the cost of buying-out benefits with an insurer.
The guidance then considers which schemes are likely to use GMP conversion and those which are less likely. Factors which may tend a scheme towards GMP conversion are schemes with complex benefit structures, schemes with a large number of low earners with GMP (as this may reduce the attendant tax risks) and schemes seeking to buy-out, we have advised a number of schemes in the latter category.
There are some helpful practical frameworks for the implementation of GMP conversion set out in the guidance, whether the scheme decides to carry it out as a bulk exercise (all deferred and pensioners at the same time) or as an at retirement exercise for retiring members, as well as some key dates for legal and actuarial tasks under the GMP conversion legislation for schemes going through the process.
Nature of change in benefits
If GMP conversion is being used only to implement GMP equalisation, it is more likely to be limited to members with GMP accrued between 17 May 1990 and 5 April 1997 although all of their GMP must be converted. It is possible to carry out conversion for all of the membership if the scheme wishes to implement wider benefit design changes.
The GMP conversion legislation give trustees the power to make any amendment to benefits or the scheme that they ‘consider necessary or desirable as a consequence of, or to facilitate, the GMP conversion’ but whether that is to implement wider benefit changes or greater reshaping of benefits due to GMP equalisation, the trustees will need to carefully balance the benefits of conversion and reshaping against the impact on members.
The guidance notes that in ‘practice, schemes adopting GMP conversion to achieve GMP Equality have tended to take an approach which involves more than relabelling but not to make dramatic changes to pension indexation’.
It explores a number of options for post conversion benefits:
- relabelling and ‘pseudo GMP’ – all tranches of a member’s pension after conversion behave in the same way as before. This removes GMP but could give rise to the same inequalities in benefits and retains the complexity of administration and understanding;
- removing the complications of GMP – this could include, removing restrictions on retirement age, simplifying the rate and timing of pension increases and smoothing GMP ‘step ups’ or simplifying death benefits; and
- reshaping benefits – such as changing the rates of indexation or revaluation on tranches of benefit. The guidance notes that where significant reshaping is contemplated, member consent should be considered.
The guidance notes the current lack of guidance from HMRC on tax issues relating to GMP equalisation via GMP conversion. Particular areas of concern are in relation to the Annual Allowance (especially around the deferred member carve out for deferred members) and Fixed and Enhanced Protection and sets out that these are resulting in constraints on the way in which GMP conversion is being applied.
It gives some useful pointers on these issues but notes that it is essential for trustees to obtain specialist advice. Schemes may wish to seek non-statutory clearance from HMRC in relation to specific tax points but the guidance makes clear that schemes should not rely on anecdotal stories of clearance for other schemes as each application is specific to the scheme in question. Schemes should seek their own clearance if appropriate.
The guidance finishes with three examples of the implementation of GMP conversion, setting out the approach taken, the process and how the scheme dealt with the various pensions tax and other issues.
It provides helpful clarification of the approaches currently being taken by the pensions industry but makes clear that it is not a definitive guide, is not to be interpreted as an endorsement of the approaches discussed and is not a substitute for professional advice. It does however offer an accessible starting point for many schemes thinking about GMP conversion.
We have advised a number of schemes, in the process of buying out liabilities with an insurance company, on the implementation of GMP equalisation through GMP conversion. Please feel free to contact us if your scheme would like to move the GMP conversion conversation forwards.