The Department for Work and Pensions (“DWP”) has published guidance to clarify how schemes may use conversion of Guaranteed Minimum Pensions to achieve equal benefits for men and women.
Background
The DWP had published a description of the methodology in November 2016. The process involves:
- calculating the actuarial value of each member’s benefits (A),
- calculating the actuarial value of the benefits that would have accrued to the member had he or she been of the opposite gender (B) and
- converting the higher of A and B into a benefit that contains no GMP.
However, some practical issues remained unanswered and the Government is considering changes to the GMP conversion legislation to clarify them.
The 10-stage process for achieving conversion
DWP recommends that trustees considering conversion consult with their administrators and other advisers, to ensure that their plans are achievable and to identify the risks involved.
- Employer agreement
The trustees agree with the sponsoring employer that GMP conversion is to be undertaken. This consent extends to the terms on which benefits are to be converted as part of the conversion exercise. Where the participating employers have changed over the years, legal advice should be taken as to how (or whether) the consent requirement applies.
- Select members and benefits for conversion
The trustees and the employer should agree which members will have their benefits “converted”. It is not necessary to convert benefits for all members, nor to convert all at the same time.
For each member included, all of his or her GMP must be converted, though there is no requirement to equalise pre-1990 benefits as part of the process. The post-conversion benefits:
- must be at least equal in value to the pre-conversion benefits,
- must not include money purchase benefits, apart from those provided under the scheme immediately before the conversion date,
- must include survivors’ benefits in accordance with the conversion legislation and
- if in payment, must not be lower than the pre-conversion pension.
- Set the conversion date
The trustees and the employer agree the date at which conversion is to be effected.
- Pre-conversion consultation
The trustees write to the selected members to inform them of the proposed conversion and seek their views. For deferred members, trustees may (if relevant) need to explain how the process may reduce the starting amount of some members’ pensions but that the value of the payments over their expected retirement will be equivalent to that of the pre-conversion benefits.
- Valuation
The trustees instruct the actuary to calculate A and B for each member whose benefits are to be converted. They are required to obtain and consider advice from the scheme actuary in deciding what assumptions are appropriate for this purpose. The guidance suggests that the scheme’s initial cash equivalent basis may be appropriate, although trustees should consider:
- whether that basis was set as being appropriate for those members deemed most likely to leave the scheme, in which case it may not be suitable for conversion, and
- whether unisex assumptions should be adopted, in order to ensure that a member’s benefits post-conversion are identical to those that would apply to an opposite-sex comparator.
- Equalisation
Equalisation is achieved by using the higher of value A and value B to determine the post-conversion benefits.
- Conversion
The appropriate value should be converted into a non-GMP benefit, using the same assumptions as were adopted for stage 5.
- Certification
The actuary will certify that the calculations have been completed and that the post-conversion benefits are at least equal in value to the equalised pre-conversion benefits. This certificate must be sent to the trustees no later than 3 months after the calculations have been completed.
- Modification of scheme
Trustees may resolve to modify their scheme to convert GMPs, under the conversion legislation, or they may use the scheme’s existing amendment power. Section 67 of the Pensions Act 1995 is disapplied in either case.
- Post-conversion notification
The trustees must take all reasonable steps to notify the members and survivors whose benefits have been converted, either in advance or as soon as reasonably practicable after the conversion date, that benefits have been (or will be) converted. This should include how benefits will change and when benefits in payment will change (or have changed). Currently HMRC also needs to be notified on or before the conversion date that the individual’s GMPs have been or will be converted.
Practical issues
Active members present additional issues. They may be treated, for the purpose of the calculations, as remaining in service until retirement, leaving service immediately or leaving in accordance with an assumed withdrawal scale.
For current pensioners, it will be necessary to roll their benefit back to the date of leaving service, to estimate their – and opposite-sex – benefits at that point. In addition, backpayments must be paid, using one of the other methods of equalisation allowed under the Lloyds judgment ie those payments cannot be added to the value of future benefits and then be converted into future pension. Care will need to be taken in a case where members of one gender are disadvantaged initially but overtake the opposite-sex member later. DWP’s guidance suggests two possible methods of dealing with such cases:
- apply the “C2” method to generate any arrears payments and to set up the pattern of future payments, then go on to apply the conversion legislation to the equalised future payments or
- when applying the “D2” method for future payments, use an actuarial value for the initially disadvantaged sex which nets off the arrears payments that he or she should receive.
Data issues
If a scheme has only pre- and post-88 GMP data, rather than the underlying NI contributions, the guidance suggests that an approximation as to the amount of GMP likely to have accrued between 1990 and 1997 will be acceptable. Alternatively, trustees could use the DWP’s GMP Checker service, that generates member and notional dependant GMP entitlements accrued between 1990 and 1997, as well as the GMPs that would have been accrued over the same period if the member had been of the opposite sex.
More serious data issues may arise in respect of current pensioners or dependants, if their record at date of leaving service cannot be recreated.
Tax issues
Both equalisation and conversion may result in members receiving an uplift to their benefits and/or a change in the shape of their benefits. HMRC has confirmed that it is considering the implications of this in relation to:
- the lifetime allowance,
- lifetime allowance and other protections,
- the annual allowance,
- lump sum payments and
- transfers.