On 26 October 2018, the High Court held that occupational pension schemes must equalise for the effect of guaranteed minimum pensions (“GMPs”) providing different benefits for men and women.
In confirming the requirement to equalise, the judgment also considered various methods of equalisation and confirmed that there is more than one possible method. One of the possible methods is GMP Conversion, which we look at in more detail below.
What is GMP Conversion?
Legislation gives trustees the power to “convert” GMPs to regular scheme benefits, subject to following the statutory process. There are several requirements that apply, including that:
- The benefits provided after conversion must be at least of actuarial equivalence to the pre-conversion benefits;
- GMPs cannot be converted to money purchase benefits;
- Pensions in payment cannot be reduced;
- Survivors’ benefits must be provided;
- The employer must consent to the conversion;
- The trustees must consult with affected members; and
- Members and HMRC must be notified once conversion is complete.
What are the advantages of conversion?
Conversion could be attractive to schemes for which the year-by-year administration costs of other methods of GMP equalisation are disproportionate, or those that wish to avoid additional administration complexity (with the associated risk of error). In addition, GMP conversion provides trustees with an opportunity to simplify complex benefit structures, as the legislation gives trustees the power to make such other amendments to the scheme as they think are “necessary or desirable as a consequence of, or to facilitate, the GMP conversion”.
Simplification of benefit structures could aid in member understanding and communication, reduce administration complexity and reduce the cost of buyout with an insurer.
Conversion will not be right for all schemes. Those with straightforward benefits, or larger schemes which can spread the ongoing costs of year-by-year administration may be less likely to choose this route.
What do trustees need to do?
Trustees who decide that conversion is right for their scheme need to make several key decisions. These include deciding which members and benefits will be included in the exercise (e.g. only those with GMP accrued post-17 May 1990, or all members if wider benefit simplification is planned) and the nature of the post-conversion benefits.
Trustees will need professional advice at each step of the process to ensure that conversion is the right decision for scheme members and that the statutory process is followed.
Our experience
We have helped many trustees and sponsors grappling with this issue, and our wide-ranging experience enables us to quickly identify possible solutions and help you to find the right one. We’d be happy to have an initial discussion with you about the options.
Please contact Ian Mylrea if you would like to arrange an informal discussion.
