Few pension experts expect GMP equalisation to change people’s lives.
The Daily Express’ headline “Millions of women to share pension windfall” is plain wrong. GMP equalisation can benefit men as well as women. The Express, reckon 8,000 out of 235,000 pensioners will get a “windfall of £3,000 over their retirement, an amount worth around £10 pm. This is unlikely to be considered a “windfall” – even to the “lucky” 3%.
Ironically, the bulk of corporate costs of GMP equalisation aren’t likely to benefit the member at all.
Buried in the detail of the 250-page judgement is one important determination. The judgement determines that testing cannot be done on a blanket basis, using an actuarial formulation (known now as standard actuarial equivalence or “D1” model). This will come as a blow to many schemes (for whom D1 would have been a lot more attractive) and particularly to schemes that have outsourced the management of pensioners to third parties through buy-outs and buy-ins.
It will also come as a blow to actuarial practices that do not have administrative capabilities. LCP’s Pensions Partner Richard Mills commented on http://www.henrytapper.com
“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”.
D2’s been around since PA93 but virtually unused. D2 does away with GMPs altogether but it can involve people receiving less pension to begin with, unless the DWP help out with some easements. D2 looks hard for members, trustees and employers (who could be taking on some onerous responsibility for future increases).
It looks the A, B and C methodologies are going to be the choices with C the likely favourite. We could call this as an “amount” based rather than a “value” based benefit. It will be conducted by administrators (on an annual basis) rather than actuaries (on a one and done basis)
The judgment’s greater cost to schemes will be from re-engineering administrative software and testing each member annually. My estimates of “testing” start at £25 per person per year (based on administrators having to keep another two records).
The implications of moving to administrative testing will be particularly daunting to schemes that are buying out pensioners or buying in insurance. On buy-outs it looks likely that fiduciaries and employers will have to look to the legal indemnities they’ve provided insurers. As for buy-ins, the onus to pay for GMP equalisation are likely to revert to the scheme, even if impacted members are paid for by an insurer.
So, the longer-term impact of the LBG Judgment may be a boost for pensions administration. This may well change the balance of power within many pension consultancies where administration has been commoditised at the expense of higher margin activities such as investment consultancy and actuarial driven services.
This could be an unexpected benefit of the judgment. Pension administration systems have been slow to adopt the new technologies associated with the blockchain and smart ledger technology is rarely seen. If the costs of GMP equalisation testing are considered unsustainable, expect to see investment in less manually intensive processing.
Pension administrators will likely prefer to see machines learn the processes of GMP testing. Especially if this frees them to work directly with members to help them understand and manage their pension benefits.
While it is too early to predict the pace of change, the LBG judgment is certain to catalyse a long overdue investment in pension administration towards straight though processing.
The phrase “in administration” has connotations of failure. But solving problems such as the annual “equalisation testing” is a challenge that many pension administrators will relish. One administration manager I spoke with yesterday had a simple reaction to the challenge –
“Bring it on!”