Still dreaming of the equaliser

Match of the Day on Saturday night showed the panel voting Paul Gascoigne’s tears as the second most iconic home-nations tournament moment (clearly they didn’t count on the lockdown lasting this long when they started the series and are now struggling for content). For me it easily beats the Hand of God into top spot.

17 May 1990 was the Barber judgement. On that very day, Paul Gascoigne was part of the England team which featured in New Order’s World in Motion which stood at Number 2 in the charts. (Killer by Adamski was Number 1).

Fast forward to 26 October 2018 (the same year as England’s penalty shoot-out win against the Columbians – iconic moment number 3) and with the Lloyds judgement we finally find out how addressing inequalities from GMPs should be done.

Well – some aspects of how it should be done.

Broadly there are two acceptable methods (if the Employer isn’t going to be asked to stump up more). C2 – the method of comparing year-on-year benefits and paying the cumulative highest. A method which involves administration systems running dual records for life. And D2 – applying a series of actuarial assumptions to the benefit stream assumed under C2 and converting it into a “simplified” benefit. Under D2 you don’t need an administration system capable of running dual methods for life. You have converted the GMP into another scheme benefit.

Under investment

As with all things involving the words “court judgment” and “equalisation” – it wasn’t as simple as everything being crystal clear on 26 October 2018. Most importantly, HMRC needed to give guidance as to the tax implications of each method. If you leapt ahead and did something in the period before that guidance you could find yourself (or your members) facing a hefty tax bill.

In February 2020, HMRC gave guidance on Method C2. They didn’t give guidance on D2 and it now appears that they are unlikely to do so (because making conversion work for all members is likely to need HM Treasury and DWP intervention and possibly primary legislation as well as guidance from HMRC, and the period between 28 October 2018 and now hasn’t exactly been packed with available Parliamentary time).

What have scheme advisers been doing? Generally, many of them initially jumped to suggesting that D2 was the way forward. The opportunity to tidy up years of complexity in one shot. And why stop at GMP conversion whilst you are there – why not convert all benefits into something which members (and perhaps more importantly buy-out providers) might find attractive? Going for method D2 also very neatly addressed the fact that years of under-investment in pensions administration systems leaves many of those providers unable to run method C2 on their administration platforms. Many of those systems are written in code developed about the time of World in Motion. The same time at which Tim Berners-Lee was inventing the World Wide Web …

Right now, D2 isn’t a particularly attractive option. You risk leaving members open to an unknown tax bill.

Correcting inequalities

GMP equalisation has never been truly welcomed by the industry with good reason. The calculations are extremely complex and the average member will get an uplift of only say 1%. It’s not generally a good news story for employers.

In the meantime, COVID-19 has given us all enough to think about. Administrative preparedness. Covenant concerns for many. Whether to accept requests for the deferral of contributions. Whether to modify the transfer value basis etc.

But the facts remain. We know we need to equalise GMPs. We know of an acceptable method of doing so. We’ve known that for over 18 months. Many of the  population that need their GMPs equalised are in their 80s. Many of them may be due several thousands of pounds. And will die before they can get it.

I can’t help but think that one of the key reasons that these pensioners aren’t getting paid their correct entitlements is at least partly because various providers’ pensions administration systems aren’t up to the job. They can’t run dual records.

I know I’m mixing up my football songs, but when I think of equalisation, the words “30 years of hurt” spring to mind. Never stopped me dreaming.