The UK’s Department for Works and Pensions has issued guidance outlining how the Guaranteed Minimum Pensions (GMP) conversion legislation might be used to resolve the GMP inequality issue for pensions plans.
The GMP is the minimum pension that an occupational pension contracted out of the Additional State Pension between April 1978 and April 1997 on a salary-related basis has to provide to its members. It allows employers that offered defined benefit plans to contract out their staff and pay a reduced rate of National Insurance Contributions. In exchange for the lower rates, the companies promised that their pension would meet a minimum standard of benefits.
But in October, the UK’s High Court ruled that pension plans must equalize guaranteed minimum pensions for men and women. The UK government has long recognized that GMPs create an inequality in the total overall pension men and women in similar circumstances receive. Experts estimate the ruling could cost pension providers £10 billion to £20 billion in payouts.
The guidance was produced with the assistance of an industry working group in order to assist occupational pension plans that have yet to address inequalities in pension benefits due to GMPs. It describes how pensions could use the GMP conversion legislation to achieve equality going forward.
The government has said that there is not one method by which pensions should equalize benefits, adding that it is for the trustees of each plan to decide the methodology that is most appropriate for them.
Included in the guidance is a 10-stage process that results in the adjustment of an individual’s benefits to compensate for GMP inequalities as well as conversion of all of the individual’s GMP.
“This guidance is a useful first step to assist trustees and their advisers who may be thinking of using the GMP conversion legislation to resolve the GMP inequality issue,” said David Everett, a research partner at UK consulting firm Lane Clark & Peacock. “However, more needs to be done, by both the DWP, HMRC [HM Revenue and Customs], and the courts before much needed clarity is achieved on how to operate this approach in practice.”
The DWP said it is still considering additional changes to the GMP conversion legislation to clarify certain issues, and will update its guidance periodically to reflect any changes in legislation or material developments in case law.
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Tags: Department for Works and Pensions, Guaranteed Minimum Pensions, Pension, UK