GMP Equalisation - The Story So Far
O&M Pension Solutions’ Senior Pension Analyst, Peter Pearce, looks at how the recent GMP Equalisation ruling has impacted CETV statements so far and provides comment on the necessary solutions.
Following the High Court Ruling in October 2018 that GMP should be equalised, we at O&M Pension Solutions are now seeing the impact of this in Cash Equivalent Transfer Values (CETV) issued to deferred members of Defined Benefit schemes.
INCONSISTENT SCHEME APPROACHES
While many scheme administrators include a paragraph within the CETV statement pack to confirm that GMP equalisation has not been taken into account and in turn highlighting that there may be a top up paid as an additional value in the future, others have started to take GMP equalisation into account when calculating transfer values. This does not necessarily mean that a higher transfer value will be paid, just that GMP equalisation has been accounted for.
If the transfer value has increased it will have been calculated using more valuable benefits but it is likely that the actual benefits shown on the member’s benefit statement have not been adjusted. In these instances surely we should be basing our Transfer Value Analysis report on the increased benefits too?
If both the transfer value and the member benefits shown have been adjusted to allow for GMP equalisation then the Transfer Value Analysis report should reflect the adjusted benefits. That said details of the adjusted benefits may not be provided by the scheme until the member actually reaches retirement. This results in a situation where the transfer value provided is not the transfer value of the benefits being illustrated, thereby understating the value of the defined benefits and giving the impression that a transfer out is more favourable than it really is.
One solution is to obtain the transfer value based on both the adjusted and unadjusted benefits. This way you can see the level of increase applied to the transfer value and can produce two Transfer Value Analysis reports:
- A report with the unadjusted benefits and the unadjusted transfer value (ie the transfer value is based on the actual benefits being illustrated)
- A second report based on the unadjusted benefits but with the higher transfer value
For our Transfer Bureau customers we will provide the second report free of charge, as we feel that this is an important issue that should always be taken into account. A note will be added to the report to explain the reasoning including what the scheme have done.
Users of our Transvas Profiler software will simply need to run the second report and use the Notes facility to add appropriate text to their report.
UNADJUSTED TRANSFER VALUE NOT AVAILABLE?
In the event that the scheme has increased the transfer value but will not provide the unadjusted valuation, it will not be possible to produce a second report. In such cases it needs to be drawn to the client’s attention that the pension benefits shown in the report may be understated. For Transvas Profiler users we suggest adding a note to the initial report to this effect.
We will be monitoring the way schemes address equalisation within their CETV documentation over the coming months. Should we identify any significant changes that will impact on the production of Transfer Value Analysis reports we will of course provide further commentary.
As always our Support Team are on hand should you have any queries about the content of your reports.
O&M Pension Solutions