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.