Atkin trustees, actuaries, consultants & administrators

Madness of pensions legislators

So the madness of our pensions legislators continues with the Minister’s announcement that schemes will, alas, have to try to untie the Gordian knot of GMP equalisation. 

The need to assess how GMPs should be equalised, the estimating of the additional costs, the advice on how best to implement GMP equalisation, the reopening of old calculations (many of which will be poorly documented), the comparison of payments made with payments due may have some pensions consultants and administrators rubbing their hands with glee.  I personally find the whole concept of GMP equalisation abhorrent.

Anyone who has tried to recalculate benefits to allow for equalisation that has been deemed to have been implemented incorrectly will know that the exercise is fraught with difficulties, is rarely precise because of lack of information and is hellishly expensive to complete. 

Please let us have some common sense here.

The GMP is intended to be more or less equal to the deduction that is applied to members’ SERPS entitlement in respect of contracted out service.  Surely the answer is for the Government merely to say that, where schemes might be required to equalise GMP, the corresponding deduction from State benefits is increased similarly so that the overall expected benefit from Scheme and State is the same. 

Note here that the Government appears to have the power to make changes to State benefits (witness the raising of the State pension age) without the need to protect accrued benefits.  I know that there would be cases around the edges where this might not be work and that the concept of considering State and private provision together may be controversial.  However, unless the world has gone completely mad, why would any member question the approach if their net position is going to be unchanged?

Could the Government be criticised?  It hardly seems so since they would be equalising benefits for men and women. 

But wouldn’t this be equalising down?  Yes, but it appears that the Government is allowed this privilege (note the raising of the State pension age again).

Wouldn’t life have been simpler if schemes had had the same privilege to change the normal pension age unilaterally for future retirees?

The issue of GMP equalisation may seem to the Government to be the right thing to do but creating further mayhem in a pensions industry which, year after year, has been bombarded with ill conceived or ill thought out legislation hardly seems the best way forward. 

Our pension provision has been made incredibly complicated and increasingly complex and costly to administer.  Let’s not sick the boot in with GMP equalisation.  The issue has been stuck in the drawer for 20 years, it is a nettle that few schemes have decided to grasp.  For the good of all let’s leave it that way.

And what of non - GMP benefits?

Whilst thinking about the subject of GMP equalisation which has recently been thrown up, I turned to the ‘back-equalisation’ of other pension benefits under the PPF as an example of the potential futility of this exercise.

The PPF has forced many trustees to look closely at their trust deeds (perhaps in some cases for the first time!) and review the action that was taken to equalise pension benefits as a whole. 

Members may have been advised that pension ages have been equalised.   They understood the new common pension age and were happy to accept continued membership on this basis.  Schemes have been administered on this basis.  However, it seems that, because the scheme documents were not revised properly to put into effect the change to pension ages, the change has been deemed not to have been made at the date everybody thought. 

Despite the fact that everyone (companies, trustees and members) understood and accepted the original change it appears that estoppel principles (ie what everyone understood was the case) do not apply and a strict legal interpretation is imposed.  Should this be re-examined?

The result has been windfall payments for many members with the costs being met by the sponsoring employers (or in the case of the PPF, other sponsoring employers, or FAS, the Government ie you and me).  And, hey presto, the pensions advisers have made a killing putting this into place, all of which has been funded in the same way!

Which brings me to my main concern relating to ‘back-equalisation’ of scheme benefits:  The putting right of supposedly incorrect equalisation is a costly exercise.  To dig out the file for a member who took early retirement in 1995, say, to analyse the way in which the benefit was calculated, to assess how the calculation should be revised, to determine actual pension payments made over the last 15 years (possibly using incomplete records), to compare that with the pension that should have been paid can cost hundreds of pounds (just for one member). 

The additional payment might then be £5 per annum.  So we have spent £500 (say) to determine that a member will receive an extra benefit worth perhaps £50.  Is this madness?  Legislation seems to require that the PPF (including the ex-FAS) has to make this calculation no matter what the cost – again all good news for the advisers but bad news for employers and the tax payer.  Quite frankly, it makes my blood boil.  We need to introduce some pragmatism and common sense into this process. 

Perhaps the Government ought to appoint a Minister for Practicality in Pension Fund (a new PPF) legislation.  It is long overdue.

First published: 05.02.2010

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