I’m too close to the Lloyds Banking Group two year legal case against its trustees to venture opinion on the rights or wrongs of the legal decision. I simply hope that the judgement turns out to be the least worst option.
But of the business of requiring GMP equalisation I have this to say
“What a waste of time and money”
Or as Ros Altmann puts it
High Court judgment today, requiring Lloyds Banking Group pension scheme to equalise the Guaranteed Minimum Pensions of men & women, is likely to cause enormous costs for many schemes, while delivering little if any additional benefit. Read my blog – https://t.co/SOLc0TfrTx
— Ros Altmann (@rosaltmann) October 26, 2018
Contrary to press reports, the bonanza of extra pension payments will not happen, around three quarters of the 235,000 Lloyds Banking Group DB members will not receive any more from the judgement than they had before. Only a tiny number will benefit from a meaningful increase in their pension (measured at above £5 pm).
It is not the members who are getting a bonanza payment, though some schemes will – purely by quirks in scheme design, be more effected than others.
Nor is it actuaries who will benefit from GMP equalisation. The judgement suggests that the actuarial equivalence method (D1), that everyone uses today, cannot be used going forward – in buy-outs and buy-ins, meaning that many trustees on buy-ins will be back on the hook and many buy-outs will be revisited for the legal indemnities provided by trustees to the buy-out merchants , where the law hardens,
In theory it will be administrators who will benefit from all this, as they will be required to do the testing , member by member. Since the impact of GMP equalisation is so complex, there are no hard and fast rules that can be applied so we are looking at the building of complex administrative machinery and a lot of manual processing (unless someone applies a block chain type solution – which seems highly unlikely).
The unfortunate conclusion we have to draw from yesterday’s ruling in the High Court is that there are unlikely to be any winners from this, just an awful lot of deckchairs moved from one side of the Titanic to the other.
Chelsea fans can liken GMP equalisation to the Winston Bogarde of benefits.
Bogarde – 3 years on the bench without a game
That we should be attending to deckchairs when there are more fundamental problems with a sinking ship – is very sad indeed. But I suspect that it is the necessary consequence of a wider legal system which is attempting to equalise the states of gender that have been with us a few millennia!
I am not going down that road!
So what in practice will this mean?
First things first, pension fund administrators will have to adopt new processes and that will require investment in automation or a lot of manual work.
The estimates I have seen suggest that quite apart from the initial investment in technology to adapt systems (a multi million project for each software supplier), the extra cost of administration will be around £25 per person a year. This is a straw that may well break a few camels.
You cannot just wish away this cost as it appears to be there whether you outsource the pension problem to a third party or keep it in house. Buy-out costs will inevitably increase as those administering the buy-out – include the cost of the extra administrative burden. Past buy-outs may well be revisited and trustees who thought their job was done , may have to be woken from their slumbers.
What in practice, GMP equalisation will mean is that a few people will find themselves the random beneficiaries of a little extra pension for the rest of their lives. No one will get less pension – unless the extra cost of providing pensions breaks the camels back and schemes fall into the PPF. I think it unlikely that schemes will fall into the PPF because of GMP equalisation , but I suspect that when the post-mortems are done – the attribution of misery will include the ongoing bills for GMP equalisation.
The extra cost of benefits will impact corporate balance sheets, albeit marginally and it will be another reason that pensions will be hated in the boardroom, amongst professional shareholders and it will be another disincentive for investment in companies with large DB workforces (or at least a heritage workforce of deferred pensioners).
I can see no joy in the advent of GMP equalisation.
I am sure that the Lloyds judgement will result in a deluge of legal and actuarial briefings over the next few weeks, seminars will be arranged, canapes will be enjoyed, wine will be drunk as people bemoan the fate of their pension schemes.
Those who are winners will be informed and they will be non-plussed by the tiny windfall that they receive. Those who get no windfall may feel aggrieved , in a beggar my neighbour way – though this unlikely to be water-cooler stuff as most people who will get a windfall with have left the company.
The admin software suppliers will be kept busy as will administrators. I guess there is a kind of job security about being a pension administrator (the pension lawyers will see to that). But it is a joyless task, to be checking GMP equivalence for the rest of your career – it is a colossal waste of administrators time – time that could be better spent.
There will be a lot of non-compliance and the Pensions Regulator will have another duty to enforce. Exactly how all this will be audited is yet to become clear but no doubt there will be whistle-blowing to be done – with all the conflicts that involve.
If I am painting a picture of unremitting misery, it is quite intentional. When it comes to GMP equalisation I have said it once and I will say it again
What a waste of time and money!
Exactly that
Spot on, Henry.
Another football chant also comes to mind, usually directed at referees (altho’ some members of the legal profession and justiciary do seem to me to be a little touchy just now in the wake of Baron Hain):
You don’t know what you’re doing.
Henry – I agree it is not ideal that the standard actuarial equivalence method (D1) has been ruled out by the Court.
At LCP we are strong advocates of helping clients to run their DB schemes as efficiently as possible. We are giving serious thought to the alternative actuarial equivalence method (D2) for clients who regard ease of administration as a key objective.
It must be a bugger for you guys, not doing administration.
Henry – At LCP we carry out pensions administration for a wide variety of DB schemes, most of which hold GMPs. We will implement an administration-focused solution (ie some form of dual records) where that is requested by clients. We think the actuarial equivalence method using GMP conversion (method D2) is potentially a route to some welcome long-term simplication for clients with a particular focus on ease of administration. Richard
My mistake – sorry Richard – put right on this independently by Sam Mullock!
Most C/out DB schemes that I have dealt with over the years provided a benefit at State retirement age which was far in excess of the revalued GMP, like with everything you will get a few anomalies, so I cannot envisage some of the claims made the media coming to pass.
In fact it may be situation that females may find that they are worse off at the end of the day when it comes to annual pension increases on their pension.
A very good (as always) summary and take on this Henry; thank you.
My initial reaction was 176 pages…………..what the £$£$. However, on the plus side – I have unfortunately been suffering from insominia of late; not being able to get to sleep till 4 or 5am. And that’s even with good sleep hygiene and the odd tablet, even herbal remedies didn’t help much. Looks like I’m sorted now – got to page 6 last night and slept like a log.
Will now save some cash on prescriptions. Thank you Mr Judge. 😉
All the best,
Saroop
Spot on Henry et al.
Perhaps a group of men should sue a high-profile scheme on the grounds that their GMP age is five years higher despite living 3 – 4 years less?