Guaranteed minimum price-tags (GMPs)

We’ve recently had the 21st anniversary of one of the most profound judgements in pensions, the Barber ruling. This was the judgement that meant that from 17 May 1990 pension benefits accruing for men and women had to be equal; the main impact being on retirement ages. Up until this point most schemes operated on the basis of a retirement age of 65 for males and 60 for females. As a result of the ruling they were forced to equalise downwards to 60 for both sexes until such time that the scheme adopted an equal retirement age. This period is unlovingly known as the Barber window. Unlovingly due to its added complexity to every calculation that is done!

21 years is a long time but the impact of this ruling is still being felt today in many ways.

In private sector occupational pensions, I still see schemes that are being caught by the ruling. This isn’t because they failed to do anything, but because they failed to cross every t and dot every i. The intention, and the understanding of that intention by all involved, It’s often entirely clear. However, legal advice says the scheme never equalised because it wasn’t done in quite the right way! Madness! This has resulted in schemes spending a fortune on legal costs and then administration costs of putting things right. Then to really ice the cake they end up with larger liabilities!

Recently in the news has been State Pension Age (SPA) for females. SPA was originally set at 65 for males and 60 for females. Since the Barber ruling it was decided that SPA would be equalised at 65. However, unlike in the private sector where this was done on accruals (i.e. it only impacted on pension accrued after the change date) it was decided that this would impact on all benefits but it would be phased in over a number of years. SPA for females is therefore currently being phased from 60 to 65 over the 10 years from 6 April 2010 to 5 April 2020. More recently it was decided that SPA should increase in phases to 66, 67 and 68 to control the costs of state pensions and it’s now been decided that the move to 66 needs to happen quickly. This is difficult to argue against from a theoretical perspective, as it should be a much greater increase if it were to represent a fair rise based on longevity statistics. However, a problem has arisen because the increase to 66 is planned to take affect during the pre-existing period of phased increase to 65. This means some females may see a significant movement in their SPA within in relatively short period (my mother being one of them!) and resulted in the protests seen recently.

The real madness is still to come though.

It is possible that later this year legislation will be introduced in relation to the equalisation of Guaranteed Minimum Pensions (GMPs). GMPs form part of pension benefits accrued between 1978 and 1997 for occupational schemes that “contracted-out” of state benefits. Contracting-out meant that you gave up your entitlement for accrual of SERPs (State Earnings Related Pension – now the State Second Pension) and in return paid lower national insurance contributions. The pension scheme then had to guarantee to provide you with a minimum level of pension designed to be in line with the state pension given up.

If you’re still with me this means that at retirement you then get:

Scheme Pension (includes GMP) + Normal State Pension – Contracted-Out Deduction (effectively=GMP)

The problem is that GMP is not an equal benefit. This was by design as the state pension it replaces is not an equal benefit. But despite this, it seems there are plans afoot to equalise GMPs such that at retirement you get:

Higher Scheme Pension (includes equalised GMP) + Unequal Normal State Pension – Unequal? Contracted-Out Deduction (COD) (effectively=unequalised GMP)

What a load of nonsense!

Another bit of nonsense is that, having reviewed the rules of perhaps over 250 pension schemes, I have never seen the calculation of GMPs specified in a scheme’s rules. It is legislation that govern’s their calculation and the National Insurance Contributions Office (NICO) that tells schemes what a member’s GMP is (scheme’s merely estimate them).

So if schemes need to equalise we will have a process of:

  • Pension scheme calculates scheme benefit
  • Legislation says provide a GMP
  • NICO tells scheme what the GMP is
  • Pension scheme equalises this and recalculates scheme benefit

If GMPs are ever to be equalised then NICO should do it and CODs equalised too so it makes some sense. If schemes are told to equalise GMPs then let’s all complain to NICO everytime it provides unequal figures!

The end result of all this will be slightly higher pensions for some members. The real winners though will be the advisers who will make a fortune out of doing it as, one thing is for sure, the equalisation of GMPs will have a Guaranteed Minimum Price-tag.

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A socialist tory in pensions

Following my outing as a “tory” I feel empowered to use the word again within a blog title!

I mentioned last week to a colleague of mine, one Henry Tapper (all round nice guy and someone I’ve grown to like a lot over the last year), that I recently stood for election. “Really?” he responded, “For what party?”. I thought about just telling him but wondered where he thought my views stood given what he knew about me. “Have a guess!” I therefore retorted. It then went as follows:

“Labour?”
“No”
“Liberal democrats?”
“No”
“Greens?”
“Certainly not”
“Communists?”
“No!”
“Surely not the conservative party?”
“Yes”
“But you’re a socialist!!”

I firmly believe that we’re all socialist – nobody would ever suggest a complete removal of taxation and public services no matter how “right-wing” they were! I had a suspicion Henry would guess as he did though given my views on pensions; a defender of collective defined benefit schemes and maintaining these in the public sector.

My underlying political views are of minimal government interference and simplicity. The world should have as little regulation as possible and markets will automatically solve many problems. The government is there to step in where things don’t work as efficiently as they should and pensions is a great example of this. However we currently step in at the wrong place. As such we have ended up with a combination of over regulation and an encouragement of market principles in something where there isn’t really a market!

Remove the regulatory burden and the crazy bond market principles and occupational pensions can thrive once again.

I’m outing myself as a tory

Ballot papers

Some of my votes

There it is, I’ve said it.

I’ve not hid it that well to be fair; given that I’ve been a party member for the last year along with when I was at university, and I also have conservatives listed under political views on my Facebook profile. However more recently I was perhaps a little more public by standing for election on May 5th!

I managed to secure almost 17% of the vote and came third as was expected: Leeds council Moortown ward results.

I’m hoping to find the time to write a bit more about it and, in particular, the human side of politics, such as the impact on those losing their seats that we generally don’t think about. However, that’s not the topic of this blog post (the first for some time) which was inspired by watching this week’s BBC Question Time. It was a show full of audience comment/reaction of negativity about the “nasty” party, ideological self-interest, destroyers of public services and haters of the NHS etc. Comments like these are actually why I rejoined the party a year ago. For the avoidance of doubt, this isn’t because I believe in these things and so wanted to be part of it, but because I was tired of sitting on the sidelines listening to such misunderstanding and lies.

The title of this post reflects the nature of being a tory. It seems strange that supporting something that over 36% of the UK voted for (and more England) should feel so difficult, but it does. On election day the wife of one conservative Councillor was concerned about wearing a rosette and I felt the same. I couldn’t imagine members of the other main political parties feeling like that. There seems to be such anger and hatred of the party from some that I really can’t understand.

The hatred of the party also seems to be a view that doesn’t need facts to back it up. The NHS is a classic example. Despite being the only party to ring fence and guarantee real rises in the NHS budget, everyone is talking about NHS cuts; and of course this is for ideological reasons and hatred of the NHS! Nonsense. BBC Question Time had a great example of this with a young man talking about the wonderful NHS treatment he had had recently and asking why the party wanted to destroy it. Well they don’t obviously. This is a view fueled by media headlines and sound bites rather than any understanding of what is planned.

If the party really did hate the NHS then the current economic climate would be an ideal time to actually cut the budget without worrying about any reforms at all!

Whether they will ever consider voting for the conservative party or not, if I can convince a few people that it isn’t something to hate with so much passion then I’ve done what I set out to do.