Upload
others
View
13
Download
0
Embed Size (px)
Citation preview
GMP equalisation
Mark Riches
John Fitzgerald
John Small
1
Agenda
• What is a GMP?
• Why do we need to equalise?
• What do we need to equalise?
• How do we equalise?
• The plan
2
What is a GMP?
3
What is a GMP?
• Many employers chose to contract out schemes from the State Earnings Related Pension Scheme (SERPS)
• In return the Scheme provided a pension broadly equal to SERPS called the Guaranteed Minimum Pension
4
National Insurance
Contributions SERPSGMP
£500
‘Excess’
pension
£500
Total
pension
£1,000
5
Pensio
n a
mount
Excess over GMP
(non GMP)
Pre 88 GMP
When did GMP build up?
6 April
1978
5 April
20166 April
198817 May
1990
5 April
1997
Post 88
GMP
Post 97 benefits
Equalisation (Barber) Date
Why do we need to equalise?
6
Equalisation: what is it?
7
The same pension
regardless of gender
Same retirement age
Was 65 for males, 60 for
females in many schemes
NRAs equalised mainly in
the 1990s
Same total pension on
leaving scheme Same benefit payments
Same for males and females
in most schemesBut men and women build up
GMPs on different terms
GMPs… Spot the Difference
Male GMP Female GMP
Accrual rate Lower Higher
Deferred revaluation rates Same*
GMP Payment Age 65 60
Late retirement factor Same*
Pension increase rates Same*
8
But applied to / from different ages (65 and 60)*
Why do we need to equalise?
• We always suspected we needed to equalise GMPs
• We hoped being a copy of state benefits (and set out in legislation) was enough to prevent this
• It isn’t
9
Lloyds Banking Group judgmentsQuestion Answer
October 2018
Is the Trustee obliged to “equalise GMP” to give equal
treatment in the overall pension?
Yes
Is there a single correct method of equalising or a
choice of acceptable methods? If there is a choice,
which one should the Trustee adopt?
A choice – covered later
Any limitation period on back-payments? Depends on Scheme rules
Should interest be paid on back-payments? Yes: Base + 1%
November 2020
Do trustees need to revisit past transfers out? Yes
What do we need to equalise?
11
12
Pensio
n a
mount
Excess over GMP
(non GMP)
Pre 88 GMP
What benefits are affected by GMP equalisation?
6 April
1978
6 April
198817 May
1990
5 April
1997
Post 88
GMP
Post 97 benefits
Equalisation (Barber) Date
13
Pensio
n a
mount
Post 90
Non GMP
AFFECTED
What benefits are affected by GMP equalisation?
6 April
1978
6 April
198817 May
1990
5 April
1997
Post 90
GMP
AFFECTED
Post 97 benefits
NOT AFFECTED
Equalisation (Barber) Date
Pre 90 benefits
NOT AFFECTED
Examples
14
Unequal benefits: Example 1
15
Male
pension
£1,000
payable
from age
65
Female
pension
£1,000
payable
from age
65
• Retire at 65
• Retire from active
• 0% increases on
excess pension
• CPI (max 3%)
increases on GMP
GMP
£500GMP
£600
‘Excess’
pension
£500
‘Excess’
pension
£400
Unequal benefits: Example 1
16
• Retire at 65
• Retire from active
• 0% increases on
excess pension
• CPI (max 3%)
increases on GMP
GMP
£500
‘Excess’
pension
£500
GMP
£510
GMP
£520
‘Excess’
pension
£500
‘Excess’
pension
£500
GMP
£531
‘Excess’
pension
£500
£1,000 £1,010 £1,020 £1,031
Male
Unequal benefits: Example 1
17
Female
Conclusion:
The Male is worse off
than the Female. This
needs to be addressed
Unequal benefits: Example 1
18
+£2 +£4 +£6
GMP
£500
‘Excess’
pension
£400
GMP
£510
GMP
£520
‘Excess’
pension
£400
‘Excess’
pension
£400
GMP
£531
‘Excess’
pension
£400
£1,000 £1,012 £1,024 £1,037
Extra GMP
£100
Extra GMP
£102
Extra GMP
£104
Extra GMP
£106
Unequal Benefits: Example 2
19
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
60 65 70 75 80 85 90 95 100
£ p
a
Age
Male Cashflows Female Cashflows
• Retire at 60
• Retire from deferred
• Male GMP “step up” at
age 65
Unequal Benefits: Example 2
20
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
60 65 70 75 80 85 90 95 100
£ p
a
Age
Male Cashflows Female Cashflows
Female paid
more in total
Conclusion:
“cross-over” members
Some members “behind”
today but “ahead” in
future (and vice versa)
Male paid
more in total
How do we equalise?
21
Lloyds Banking Group case: MethodsMethod Judgment
Employer
consentApproach
AEqualise each unequal aspect of the benefit separately.
BCarry out an annual comparison of the male/ female pension and pay
the higher amount each year.✓ ✓ Dual
C1
Pay the annual pension that would result in the accumulated pension
paid to date being equal to the higher of the accumulated pension
payable to either an unequalised male or female.
✓ ✓ Dual and
Accumulated
C2 As per C1, but allows for interest✓
Dual and
Accumulated with
interest
D1
A one-off calculation determining the actuarial equivalence of
cashflows generated by one of the above methods and then provide a
higher benefit to provide benefits of equal value.
D2 As per D1, but convert all GMP to non GMP ✓ ✓ One off calculation
22
The plan
23
So what?
• Benefits may be wrong where GMP built up after 17 May 1990
• Legal requirement to correct
• Small increases to pensions for some deferreds and pensioners
• Pensioners due backpayments, some already dead
• Most of the uncertainty resolved by subsequent cases and industry guidance
24
25
The impact on pension schemes
The impact on members
26
De miniwhat?
27
Can we choose not to uplift a member’s benefit if the adjustment is very small?
Past Equalisation – Key Decision
FINAL METHOD FOR PAST EQUALISATION
COMMS
LIABILITY IMPACT
COST
28
Future Equalisation – Key Decision
COMPARISON (KEEP YOUR
GMP)
CONVERSION (GET RID OF YOUR GMP)
29
Comparison (aka C2 / dual records)
30
• Annual checkWHAT?• Valid method of equalising GMPs
• No need for sponsor consentWHY?
• Dual recordsHOW?
• Some upfront costs, some ongoing costsCOSTS?
Conversion
31
• One-off process whereby GMP turned into non-GMP
• Can be applied to some or all affected membersWHAT?• Valid method of equalising GMPs
• Simplified benefits (→ admin, investment, buyout)WHY?• Scheme Actuary performs calculations and signs off
• Protections: DB, survivors, pension, actuarial valueHOW?
• More significant upfront costsCOSTS?
Conversion
32
90-97 NON-GMP
90-97 GMP
NON-GMP
NON-GMP
NON-GMP
EXTRA PENSION
Future Equalisation – Key Factors
LIABILITY IMPACTFUTURE
STRATEGYADMINISTRATION
COSTS
ADMINISTRATION SYSTEMS
COMMUNICATIONS
33
GMP conversion
Reasons for:
• GMP equalisation without dual records
• No increase in future administration costs (vs dual records)
• Some members may benefit from removal of GMP restrictions
• Opportunity to simplify benefits?
• Intending to buyout benefits or use a consolidator
Reasons against:
• Higher costs of implementation
• Reshaping benefit will result in winners and losers
• Difficult to communicate
• Disproportionate for some simple schemes
• Tax issues
34
Immediate Actions
35
STOP THE ROT
PAY EQUALISED BENEFITS WHERE POSSIBLE
TAKE STEPS TO LOCATE DATA / PROTECT LEGACY
SYSTEMS
ASSESS YOUR SITUATION
REVIEW GMP RECONCILIATION PROGRESS
ENGAGE WITH ADMINISTRATION &
SOFTWARE PROVIDERS
ASK US TO REPORT ON PAST EQUALISATION COSTS &
METHODS
CONSIDER TRUSTEE KNOWLEDGE AND SKILLS
CONSIDER THE FUTURE
FULL AUDIT OF DATA & BENEFITS?
LONG TERM STRATEGY
SPONSOR ENGAGEMENT
LEGAL ADVISORS
Next steps
36
• Your consultant to investigate and report on your scheme
• Consider need for data / benefit audits
• First Actuarial plan and report back
• Further training www.firstactuarial.co.uk/knowledge-and-news/gmp-equalisation/
• Potentially revisit this training
and our guides
© First Actuarial LLP 2021 all rights reserved.
The information contained in this presentation is, to the best of our knowledge and belief, correct. However, First Actuarial cannot be held liable for any errors contained herein and the recipient accepts that the information stated is provided on an "as is" basis. This presentation is for training purposes only. It does not and is not intended to constitute advice. Specific advice should always be sought from the appropriate professional on all individual cases.
Regulated in the UK by the Institute and Faculty of Actuaries in respect of a range of investment business activities.First Actuarial LLP is a limited liability partnership registered in England & Wales. Number OC348086. REGISTERED OFFICE: First Actuarial LLP, Mayesbrook House, Lawnswood Business Park, Leeds, LS16 6QY. Registered in England & Wales.