Is now the right time to press on with my GMP rectification exercise?

In the last 18 months most pension schemes have reconciled the data they hold for members’ Guaranteed Minimum Pensions (GMP) with the records held by HMRC.

Alan Casey’s recent blog highlighted that HMRC have started the process of providing final details of the data they hold for each scheme, including any late reconciliation transfers from other schemes. Our early experience of the data provided in the final listings is that there may be differences compared to the data previously reconciled and trustees need to consider.

Once trustees are happy that they have final GMP data they next need to consider if now is the right time to recalculate benefits for pensioners and dependants (otherwise known as GMP Rectification) where the GMP data has changed. This will involve calculating the correct amount of pension going forward and any arrears or over payments for the past.

However, the Lloyds Banking Group judgement on equalisation means that schemes will need to follow a similar process to make good any inequalities for anyone who accrued a GMP between 1990 and 1997. The scale of this task, uncertainties in the pensions tax treatment and options over which method to adopt for equalising future benefit payments, have muddied the waters somewhat and has led to many trustee boards and sponsors toiling over whether to jump in and start GMP Rectification now or wait until there is more certainty around the approach they may take to correct for GMP equalisation and do both at the same time.

Trustees will want to consider some, or all, of the following when making a decision around timing:

• Your membership – the scale of the rectification and equalisation exercises varies from scheme to scheme. For some the rectification task is small but for many there is a significant overlap between the two populations of affected members.
• Approach - many of the issues that need to be considered for rectification and equalisation, (such as interest, forfeiture, data availability and materiality) are similar to those for equalisation. The tools required are also very
• Costs - both exercises are complex and are likely to be costly for what might be very small adjustments to benefits. It may well be more cost effective to do both exercises at the same time whilst recognising that the GMP equalisation calculations will need to be based on the rectified GMPs.
• Communication - members are likely to find it difficult to understand why their benefits are being adjusted and trustees may want to combine the two exercises so that they only need to adjust benefits and communicate with members once.
• Risk of delay? – There has been much talk about how it may still be some time before there is more certainty around some of the issues relating to GMP equalisation and for trustees and sponsors feel that they are in a position to make a robust decision about how they will approach GMP equalisation. However, this only applies to equalising future benefit payments, a dual record approach must be used for adjustments to past benefits, so trustees can start calculating any arrears or overpayments for past service now. Trustees also have a fiduciary obligation to pay members the correct level of benefit and where they are aware that large adjustments are needed they may wish to act more swiftly.

The cross industry GMP Equalisation Working Group has issued its latest guidance, ‘When to Rectify’ to help trustees understand the relevant considerations when deciding on the right time to undertake the Rectification and Equalisation projects.

In my view, the decision will be scheme specific and it is likely to be more efficient to run the GMP Rectification and equalisation projects in parallel but that is no reason to cause delay, indeed member records can be updated for deferred members now to allow for final GMP data.

There is much that can be done to prepare for both exercises such as obtaining legal advice, getting the data in ship-shape ready for the rectification calculations and capturing historic scheme information and all this can be done now. The preparatory work required is the same no matter which of the Lloyds methodologies is to be applied for the equalisation of future benefits.

At LCP we have a dedicated team to help trustees and sponsors think through these issues and come up with pragmatic and proportionate solutions.