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GMP equalisation: What have trustees learnt so far?

Conversion is not the only fruit

When the Lloyds judgment first came out in October 2018, the immediate reaction was that conversion would be the preferred methodology for most schemes, avoiding the complexity of dual records approaches. 

However, the experience of those schemes that have converted GMPs to date is that it is far from simple – the legislation presents a number of thorny challenges, in particular in the context of taxation, where conversion could potentially present members with liability to the annual allowance charge or loss of lifetime allowance protection (and where HMRC have not provided any meaningful guidance). 

There is also the question of how to consult with members in a way they can understand.

These issues are leading some schemes to consider a dual records approach. Whilst the Lloyds judgment indicated that C2 was the method that trustees could pursue without employer consent, some schemes are seeing the benefits of Method B as a possible approach. 

Whilst this may lead to increased liability cost, and will require employer consent, that additional cost may be second order and should be weighed against the fewer changes to benefits and easier administration compared to C2 – and the fact that it is a simpler message for members. 

Focus on the decisions not the detail

GMP equalisation and conversion are among the most complex technical areas in which trustees are called upon to make decisions. Whilst trustees need to understand the rationale for their decisions, it is not necessary for them to be able to explain the technicalities of anti-franking or every complexity of the tax legislation. 

What they need to be able to do is challenge their advisers to explain the impact of the proposed approach on the members and the scheme. What proportion of the membership might be affected by a particular decision, and by how much? What are the risks of a member losing out? How can these impacts be mitigated?

Especially where conversion is the route being taken, GMP equalisation is not a single decision, but a series of decisions – on data assumptions, benefit design, timing, actuarial basis etc – and some of these decisions may need to be revisited in the light of company views or the availability of new information or guidance. 
Trustees may therefore find it helpful to maintain a decisions log which captures the key decisions throughout the process – enabling trustees to focus on the main milestones in their GMP equalisation project rather than being swamped by technical detail.