DWP Publishes GMP Conversion Guidance: What Does This Mean For Trustees And Employers?

Since the judgment in Lloyds1 last year, trustees, employers and pension professionals have been awaiting guidance from the Department for Work and Pensions (the DWP) on the use of Guaranteed Minimum Pensions (GMP) conversion legislation. Late last week, the guidance was published.

In the first part of our Insight, we set out a summary of the key points and issues arising from the DWP's Guidance on the use of the Guaranteed Minimum Pensions (GMP) conversion legislation (18 April 2019) (the Guidance) on the use of the GMP conversion legislation. This Insight does not:

explain why GMPs create inequality in overall scheme benefits (see our Insight GMP equalisation - what is the problem with equalisation); or unpack the Lloyds decision (see our Insight GMP equalisation - what now for trustees and employers). Unsurprisingly, the Guidance does not give all the answers on GMP equalisation. Instead, it should be seen as a step towards the ultimate destination, but with a lot of work to do to get there.

The second part of our insight sets out what trustees and employers need to consider on when and how to equalise GMPs and what actions they can be doing now to move forward on equalisation projects.

Nine key points from the Guidance

1. No single method for equalisation

   The government has not asserted that there is a single method that will be appropriate for all schemes in order to equalise benefits for the effect of GMPs. The Guidance simply puts forward one possible method for equalising benefits.

2. Trustees will need to take advice and make decisions

   It is for the trustees of each scheme to decide the methodology that is most appropriate for their scheme, having taken advice.

3. The DWP has proposed a method which uses the conversion legislation

   For the purpose of equalisation, this method:

   places an actuarial value on benefits accruing between 17 May 1990 and 5 April 1997; takes the higher of the value of a member's benefits and the value it would have been had the member been of the opposite sex during the period; and converts this higher value into benefits that are no longer subject to the (unequal) requirements of the GMP legislation.

4. DWP have provided a step process for conversion

   Should trustees decide to pursue the conversion route, the Guidance sets out a 10 stage process.

5. Past arrears are not dealt with in the Guidance

   The method set out in the Guidance does not deal with the past arrears due to pensioners. This is a difficult area and one in which legal advice will be needed (especially if conversion is the chosen equalisation method for future instalments).

6. The methodology will result in scheme amendment

   Under the DWP's methodology, a scheme is amended so that it no longer contains benefits subject to the GMP rules in respect of some or all members with GMP entitlements.

7. All GMP and the benefit which accrued alongside will need to be converted

   For a selected member, all of their GMP and the benefits which accrued alongside this GMP need to take part in the conversion process, not just those relating to accrual between 17 May 1990 to 5 April 1997.

8. Trustees do not need to convert GMPs for all members

   The employer and the trustees can decide which members will have their benefits converted. The Guidance provides an example of deferred and pensioner members being converted first, and then waiting until the active members...