GMP conversion bill makes its way through parliament
GMP conversion has been on the statute books since the Pensions Act 2007 but has rarely been used until the courts approved it as one of the methods (D2) for amending benefits for the unequal effect of GMP. It will have become apparent to schemes that have completed GMP conversion or are currently going through the process that the statutory regime is complex and detailed and brings with it a number of uncertainties, not least the tax implications.
A private members bill, which will make changes to the legislation in order to simplify certain elements GMP conversion, has now reached the second reading in the House of Lords. This offers the potential for some welcome clarification as noted below, although it is not a full solution to the various uncertainties. The proposed amendments are as follows:
- The GMP conversion legislation currently requires a survivor’s pension of at least half the value of the pension to which the deceased member would have been entitled by reference to employment during the period 6 April 1978 to 5 April 1997 (for a widow) and from 6 April 1988 to 5 April 1997 (for a widower or civil partner). The meaning of value is not entirely clear, it is capable of providing greater spouses benefits than might otherwise have applied, and some conditions applying to GMP must be preserved. This creates uncertainty and has the potential to add complication to a process that was designed to simplify benefit structures. The Bill opens the door to clarity here by providing that conversion applies to spouses as well as members and making provision for further detail to be set out in regulations. Clearly, the detail of those regulations will determine how helpful this amendment is in practice and whether it is directed at these issues.
- GMP conversion is subject to employer consent, but the legislation does not describe what happens if the scheme’s sponsoring employer no longer exists or if it has been replaced by another employer or indeed if there are a number of scheme employers – the Bill provides for a power to set out in regulations detail about who must consent to the conversion. Many schemes are likely to have taken a pragmatic approach and sought consent from the statutory employer responsible for funding the scheme (and so ultimately liable for the impact of conversion) but we don’t know if this will be confirmed in the regulations.
- Once GMP conversion is complete, the scheme must currently notify HMRC which has made clear that it does not wish to receive confirmation and the Bill will remove that requirement.
The Bill does not deal directly with the various tax issues associated with GMP conversion, especially for deferred members, including potential impacts on lifetime allowance protections or the risk of an annual allowance charge for post 2006 deferred members. However, the industry now has the benefit of experience from the early adopters, growing amounts of helpful guidance from PASA and there is a developing understanding of the options available to deal with the uncertainties even where the legislation is unclear.
In practice, most individuals are unlikely to suffer a tax charge, but schemes will want to understand the level of risk and the different approaches to timing and benefit reshaping that can be used where an individual’s pensions tax position requires it. We have advised a number of schemes in the process of buying-out benefits on various solutions to these problems as they undertake bulk conversion. For ongoing schemes, a solution may lie in conversion at retirement rather than bulk conversion and while that brings with it some further uncertainties about communication and actuarial certification, there are solutions to manage these.
Any further clarification of pension schemes’ obligations provided by the Bill in respect of GMP conversion is therefore welcome and while it will not answer all of the questions, it joins a growing weight of materials that mean the process is becoming increasingly viable for schemes.