Seventy eight per cent of pension Trustees and Sponsors expect to convert Guaranteed Minimum Pensions (GMP) into other benefits when implementing equalisation, according to new research from Willis Towers Watson.
The research also found that the majority of Trustees and Sponsors (57 per cent) believe the bulk of the equalisation process will take between one and two years to complete, with a further third (34 per cent) expecting it to take two to three years. Only 4 per cent think that it will be complete in under a year, and another 4 per cent believe it will take longer than three years.
Willis Towers Watson expects that schemes going down the conversion route will typically get rid of all GMPs, not just GMPs accrued in the period where male and female benefits must be equalised (17 May 1990 to 5 April 1997). Where GMPs are converted, the new benefits must be of equivalent actuarial value and pensions in payment cannot go down.
Rash Bhabra, Managing Director in Willis Towers Watson’s Retirement business, says: “There are three main reasons why schemes are looking seriously at conversion.”
“First, converted benefits are simpler to administer and communicate. Schemes would not need to maintain ‘dual records’ comparing what a pensioner has actually received with what would have been due to someone of the opposite sex – so they do not have to wait for these administration systems to be up and running before implementing equalisation.”
“Second, the unusual way in which GMPs increase, both before and after coming into payment, makes them difficult to hedge and more expensive to pass on to insurers. This is important when many schemes’ ultimate objective is to buy out.”
“Finally, more straightforward benefit structures are easier to communicate to members and can provide members with more flexibility. GMPs have historically placed restrictions on options such as early retirement, tax-free cash and turning a small pension into a lump sum. Telling members about conversion also provides an opportunity to explain existing options, such as their ability to take a transfer value.”
“However, there are also good reasons why some schemes are minded to keep their GMPs. Some will prefer the administrative hassle of dual records to reshaping members’ benefits significantly without giving individuals a choice. Conversion is likely to mean some members receiving more over their lifetimes and some receiving less, and this will only balance out over the scheme as a whole if the assumptions made about things such as inflation turn out to be right. Retaining GMPs for now also allows a scheme to keep its options open – it can always convert them later.”
Even with conversion expected to be prevalent, more than nine out of ten Trustees and Sponsors expect it will take between one and three years to implement the bulk of their equalisation project.
Bhabra says: “There is a huge amount of data to wade through and it is important to get equalisation right first time, with a well-documented audit trail. The last thing any scheme wants to do is to pay members the wrong amounts and have to go through the whole process again.”