Today marks the third anniversary of the landmark Lloyds legal case. This case confirmed a legal requirement to provide sex equality in pension scheme benefit structures, and remove any remaining inequality resulting from the way in which Guaranteed Minimum Pensions (GMPs) have to be provided under Government regulations.
Earlier this year, we issued a survey of our clients, to see the progress being made in this direction. Although very few of our clients had completed an exercise to equalise for GMPs, our survey found that
- The majority of schemes had placed the issue on their “to do” list, and were actively considering their options
- The great majority of schemes are now paying transfer values on an equalised basis
- Lack of key data, uncertainty over tax treatment and (to a certain extent) the cost, were cited as reasons why equalisation has not yet been completed.
- However, the vast majority of schemes had begun to identity data gaps that could impede the GMP equalisation project
We issued a short update survey more recently, and the results are just in. From that survey, we can see that our clients have made progress with the review of the data that is essential to carrying out GMP equalisation calculations, and many trustee boards now have the benefit of a data analysis and review to take into the next stage of their projects. The complexity of the equalisation requirement, when considering the detail of the necessary benefit structure, together with specific benefit design quirks in the particular pension scheme, were regarded by our clients as challenges to be overcome.
In our legal work over the past three years, we have found that GMP equalisation projects, so far, have formed part of pension scheme end-game planning leading to insurance buyout. During the buyout process, GMPs have to be equalised, and so a number of our clients are currently carrying out equalisation projects as part of the wider buyout project, or in preparation for buyout that is expected within the next three to five years. Where pension schemes have longer to go before buyout, we think the GMP project may be further out, although from the pace of data gap review analyses currently being undertaken, it is clear that many pension schemes are now planning their equalisation.
One of the most significant developments in the last couple of years since the Lloyds case has been the change in general attitude to GMP equalisation through a conversion process. Initially, many commentators and advisers felt conversion to be the winning proposition, representing a “once and done” approach to equalisation. More recently, however, views have changed, and an administration solution (the C2 option, in the terminology of the Lloyds case) has come more into favour. The reasons for this include uncertainties over the tax position of conversion (notwithstanding very helpful guidance issued by PASA), actuarial concerns over creating “winners and losers” within the scheme membership, and the additional commitment required from trustees who are prepared to make a significant change to existing benefits. This development has been assisted by a change in the attitude of buyout insurers to GMP equalisation. At the earlier stages, it appeared that insurers would insist upon a conversion approach, and this has been the position in buyout deals signed during the period since Lloyds. In the future, however, it appears likely that insurers will be more prepared to transact on a C2 basis, and without requiring conversion.
That is not to say that, as legal advisers, we have no experience of conversion. We are currently handling a number of conversion projects for our clients, many in the context of a buyout deal that has been signed and that requires conversion to take place. We do not discount the possibility that some pension schemes will go through conversion projects outside buyout, in order to simplify their benefit structure or in the context of liability management exercises such as PIE or ETV, but our current view is that this is likely to be the minority approach overall.