HMRC has published guidance which addresses some of the outstanding questions in the long-running saga of GMP equalisation. While it is an important piece of the jigsaw, we still do not have the full picture.

Background

Historically, pension schemes were often contracted-out of the State Second Pension.  Instead of these benefits being provided by the State the pension scheme had to provide Guaranteed Minimum Pensions (GMPs).  Whilst a 1990 case confirmed that ordinary pension benefits had to be equalised for men and women, the position regarding GMPs was only clarified by the Lloyds Bank case in 2018. This confirmed that GMPs do have to be equalised for men and women and discussed various methods of achieving this.

But the Lloyds Bank case left us with many unanswered questions, particularly the impact on Annual and Lifetime Allowance calculations and other tax consequences.

Some questions answered

The Guidance applies to the ‘dual record’ methods of equalising benefits (methods B and C under the Lloyds case) where the administrators run two sets of records concurrently (one for the member and one for a comparator of the opposite gender).

The good news is the Guidance confirms any increase to benefits as a result of dual record equalisation is not a new entitlement to benefit but a correction of an existing benefit. Therefore, such adjustments on their own would not typically count towards a member’s Annual Allowance, nor cause a member to lose existing Lifetime Allowance protection.

But some questions remain

The bad news is that the Guidance does not cover the tax consequences of the “conversion method” of GMP equalisation (where GMP benefits are converted in to main scheme benefits - method D under the Lloyds case). Nor does it cover the treatment of lump sum and death benefit payments. HMRC has said it aims to give more guidance on these “as soon as possible” but has not given a timescale.

Further practical guidance is also expected shortly from the GMP Equalisation Working Group, and the next hearing of the Lloyds Bank case (scheduled for the end of April) is expected to provide answers on past transfers out.

Trustees and employers looking to move forward with GMP equalisation remain in an awkward position: they are obliged to equalise GMPs but still do not have all the answers. For many, waiting for further guidance will be the best option. But schemes seeking to buy-out will have a more pressing need to move forward with pieces of the jigsaw still missing. The potential tax consequences are significant so it will be important to take legal and actuarial advice to develop a plan. We are here to help.