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Chris Brown, Director, Burges Salmon

Hello everyone, my name is Chris Brown and I am a director in the pensions team here at Burges Salmon, and we are delighted to introduce you to season two of the Burges Salmon Pensions Pod. The six episodes of season one are available on our website and cover a range of topics including the single code, transfers to master trusts, RPI CPI switches and various other topics, so if those sound of interest then be sure to take a look.

Helen Cracknell, Solicitor, Burges Salmon

Welcome back everyone. I'm Helen Cracknell a solicitor in the pensions team and in today's podcast we'll be discussing how our clients are progressing with their GMP equalisation projects.

Chris

Our guests today are Catrin Young, our practice development lawyer in the pensions team who is responsible for keeping us all up to date, and is a key part of our GMP equalisation working group, hi Catrin.

Catrin Young, Practice Development Lawyer, Burges Salmon

Hi Chris, thank you, nice to be here.

Chris

Hi Catrin, and Simon Reddish, a partner from XPS who is heading up GMP equalisation services across XPS, hi Simon

Simon Reddish, Partner, XPS

Hello Chris, thanks for asking me to join you today.

Chris

Hi and welcome to the podcast. So, it's now over three and a half years since the high court established in Lloyd's that trustees of DB pension schemes have a duty to equalise benefits for current male and female members of their schemes, to account for the fact that GMPs are unequal, as between the sexes, GMP equalisation.

 

So, Catrin to kick us off, how are schemes getting on with their GMP equalisation projects?

Catrin

Yes, well apart from those schemes that are looking to buy out and wind up, so basically they've got a hard deadline to get things done so that they can issue individual policies, I think it's fair to say in our experience, Chris, quite slowly, but that's probably not surprising given the number of schemes that are affected in having to deal with GMP equalisation and that we've only got a finite number of administrators in the market who were obviously having to deal with lots of other things, including dashboards at the present time, so yes quite slow, but slow but steady.

Helen

Thanks Catrin, I think I'd agree with that. We recently did a webinar on this, didn't we? Didn't we ask our clients to do a survey about this?

Catrin

Yes we did, we held a GMP equalisation webinar with OPDU, the Occupational Pensions Defence Union, back in March and you can get that on our website, but in advance of that we'd ask clients how they were getting along with GMP and 38% of the respondents were still in the very early stages of GMP equalisation, so investigating and planning. 50% were still looking at which of the methodologies they were going to use to implement GMP equalisation, and only 12% had actually started the work of correcting and paying the increases. No one had finished, unsurprisingly, looking at existing members, so yet to move on to former members.

 

Is that in line with what you're seeing with your clients at XPS, Simon?

Simon

I think it is. I think across our client base we've seen quite a lot of them are doing it, we're making progress through it and lots of them working through the first phase of our approach. We do approach this a little bit differently to some other firms so, I might talk about that a little bit later but, yes a lot lots of clients are in the process of doing it, but actually the ones that have actually got right to the end and completed, is a reasonably small number and I think most of those are ones that are driven by buyout, where there's a transaction and it's unnecessary and there's an incentive for them to get there, but I would say we do have other clients that have gotten to the end of GMP equalisation because the trustees just want to get it done and there are early movers on it and they just want to get this done and put away once and for all.

Helen

Thanks Simon. So it sounds like there's a big range with clients but generally they're in the early stages, despite the regulator urging trustees to get on with GMP equalisation last October?

Catrin

Yes I think that's fair Helen, but in fairness I wouldn't say it's all the industry's fault, there have been some areas where we've really needed more of an early steer perhaps from HMRC or some legislation, particularly on GMP conversion, so for example we had some HMRC guidance issued in early April, which basically acknowledged what we've all been saying for some time, that there are tax issues in relation to conversion for deferred members and in that guidance they've finally given a hint that they're going to look at legislative change for that, so we're still waiting for that and even though we eventually got the private members bill through with Royal Assent at the end of last month to help with some of the issues on conversion, we still don't know how to deal with survivors benefits on conversion until the regulations under that act are consulted upon. So I think for those schemes who were looking to convert, there are still some unanswered questions, but for others I think there's now a good wealth of experience and knowledge in the market to get cracking.

Simon

Yes and I think I'd add to that that I think a lot of our clients are waiting for an efficient way of doing this, I think a lot of clients didn't want to be the first ones to do it and so now that they're built, now that firms have got systems to be able to deliver that we are seeing a sort of big push to actually make progress on this.

Helen

Thanks Simon. Are you seeing people choosing one of the methods over the other ones, or are you seeing quite a range in your clients?

Simon

Yes it's an interesting question because I think when the Lloyd's case came about I think there was a general presumption amongst the market that a conversion approach would probably the way that most clients would go, and I think that's probably driven by a way of getting rid of GMP and actually just dealing with the problem and making it go away, but also it was like what had been done for clients that are going towards a buyout before the Lloyd's case, but I think as more thought's been given to it and a little bit more thinking about how the different ways of achieving equalisation can work, I'd say it's very much more 50/50 now around whether clients want to adopt a conversion approach or perhaps a dual record approach. I think as a firm we don't push a house view of one way or another, and what we want to do is understand the specifics of the client's situation to be able to help them make an informed decision about which is the right approach. I think that of the dual record approaches, I think that perhaps the majority were looking at method C2 as you'd expect, because that's the one that trustees can use without any consent from the employer, but actually we're often seeing method B is quite attractive. Method B potentially is a little bit more expensive from an actuarial point of view on scheme benefits, but it's simpler to administer, simpler to communicate to members, so it's come out as an unexpected extra option in the GMP methodologies that perhaps wasn't expected a few years ago.

Chris

Yes and I'd echo that as well. Of my schemes that are carrying out their GMP equalisation projects the two that are the furthest advanced have picked their methodology, spoken to the employer about it and are both, unless of anything changes, progressing method B, and for them I think there wasn't that much cost between B and C2, and the big driver for them was simplicity of explaining to members, so that simplicity of message was a key factor.

 

Simon what about insurers, do they have a preference for a particular method over another, or are they all now able to offer dual records as well as conversion?

Simon

Just on the point you just made there, we're seeing that as well, we're seeing the cost difference between different methods are very similar, so actually yes I echo that point as well. I mean in terms of insurers, based on our intelligence and our risk transfer team that deal with them a lot and the conversations I've had with them, and I think one insurer will only do D, one ensure that will only do C, and then the rest of the market will work with both, and I think on that basis clients are able to proceed with either method really, a dual record method or a conversion method, with confidence that they will be able to insure them, and I'm aware that some insurers make no cost difference between their extra administration for doing dual records versus conversion, so I think if you're starting from a blank bit of paper I think that that's not necessarily a problem, but the bit that I would caveat here is for clients that have already done something with an insurer, so if your scheme's already done a buy-in and it's ensured a particular form of benefits, most likely some pensioner benefits, if you decide later to then convert those benefits into a different form that needs some careful thought because you're effectively going to change the shape of those benefits, potentially bring in actuarial risk that don't match from a financial point of view, and also probably from a legal point of view how you get from that buy-in contract to a buyout contract. It could potentially be difficult, so if you're in that situation I think it does point you a bit more strongly towards some method of keeping the benefits the same as they are, so it's a dual record approach.

Catrin

Yes, I'd agree with that Simon, because I think that most insurance contracts when you do the buy-in will give you limited circumstances in which you can reshape between buy-in and buy-out, so usually if you go into a sort of PPF assessment period you can reshape, but outside of that it does become quite limited, so I think that's definitely a good point.

Helen

Presumably, Simon, there are some benefits for the schemes who are in the early stages of their GMP equalisation, because as we're seeing there's more and more guidance coming out, particularly from the PASA working group on GMP equalisation, that means that those schemes might not have to go back and change if they haven't equalised already?

Simon

Yes, I think that's helpful I mean there are wider opportunities from conversion and buyout as well. There are potentially benefits that are difficult to ensure. I have a client where they have a particularly unpleasant underpin that spreads across GMP and non-GMP benefits and by looking at that there's potentially an opportunity from conversion to be able to change that into a different form, and that'll be much easier to ensure and it's actually a point around whether the insurers have got appetite for that benefit because of their reserving requirements, so it's not necessarily just the cost of the insurance it's whether they want to take it on. So actually that's a hugely beneficial opportunity for that particular client, or clients in the situation of wanting to simplify benefits as well.

Chris

Simon, you mentioned earlier about a number of your clients having completed the first phase of XPS's approach, do you want to tell us a bit about where you're seeing things and how you're working things with your clients?

Simon

Yes that's right, I mean actually as a firm we've been doing GMP equalisation calculations for quite a long time and we've been involved back office for an insurer for probably getting on for 10 years now, and where we've provided support in these sort of calculations and what we did is quite a lot of learning there about how equalisation can be done, but when the Lloyd's judgment happened we knew we needed to scale this up and we needed to be able to deliver this on a big scale for our client base and so what we did is we did some thinking about how to organise this and one of the big challenges is around data and how much actual data crunching can be needed just to rebuild members benefits,  and it can be really painful and expensive and we're very much not about that so the approach that we take is to break it down into three phases, and the first phase is to run individual member calculations for everybody, but what we do is we use a readily available set of data and we make some simplifying assumptions in the calculations around factors salary information and early retirement terms and that sort of thing, we then run everybody through and then we stress test those results using our model to be able to identify where finding extra information is valuable to the member, it actually makes a difference to the equalisation outcome and by doing that what typically we tend to see is it reduces the amount of members where we need to find extra information from the whole in scope membership down to maybe only 10, 15, 20% of the membership so it really makes it a more manageable exercise so the administration team can spend less time looking through that information and do that a bit quicker and the other benefit is we can start making strategic decisions a lot earlier in the process as well, so we can start talking about methodology choice and we can start thinking about how conversion might work if that's what the client wants to do, make progress into this second phase which is actually that sorting out that data, making strategic decisions, and then the third phase is to implement and to run this through, and I'm pleased to say about 150 of our clients have gone through the first phase already, so I'd say they're breaking the back of the job, there's still work to do and there's still things to find, but we do think that we can show some real progress for those clients.

Chris

Yes it sounds really interesting and anything that reduces the requirement for data needed up front has got to be a good thing in in my book I think.

Simon

Yes it was really important because as you said the market was busy before GMP equalisation came and it is a real capacity constraint across the pensions industry so anything we can do to reduce the burden, make it cheaper and more efficient for clients, is definitely welcome.

Chris

Yes absolutely and for those clients they're perhaps sort of in that second phase, what common questions or burning issues are you seeing clients raise in relation to GMP equalisation?

Simon

A lot of the time it's trying to understand the decisions that the trustees need to make, so they're looking through that process and saying how much does this matter, so being able to sort of quantify things because you can boil the ocean can't you, effectively, you can spend a lot of time changing people's benefits by 20 pence or whatever, and actually being able to see that and quantify it is really important, that's a particular thing that we see a lot. We see common themes actually with the legal questions that come out, quite often around later earnings editions and how that should be applied, about looking at back payments and any restrictions on that and also specific client-focused benefit questions about the interpretation of the rules and how that should be factored in.

Helen

Catrin, same question for you, what kind of common themes and questions are you seeing from our clients?

Catrin

Yes they're very similar to Simon, lots of technical questions on anti-franking and looking at forfeiture and where can we be commercial or pragmatic in terms of applying de minimis levels and those kinds of questions, but I think where there's still an awful lot of confusion is about transfers and the need to revisit historic transfers out, so we're seeing an awful lot of questions about that following Lloyd's 3, because actually what Lloyd's 3 looked at was a very narrow point it only really looked at statutory transfers and said that schemes had to top those up for former members, so we're seeing lots of questions about well what do we do for non-statutory transfers or bulk transfers, DB to DB, or DB to DC, so we're still getting an awful lot of questions about that and where perhaps we can help to reduce the scope of the project in relation to those

Helen

Could you give our listeners a sneak peek about what kind of steer you're giving our clients?

Catrin

Happy to.

 

Yes so statutory, I think we covered those quite a bit on our webinar, which is earlier in the year, but we're getting some questions there about applying de minimis and if you want to know about those then definitely we can give some pointers there, on non-statutory basically the starting position is that the transfer decision was validly made, so it's quite a different concept really to statutory transfers, although you do need to check what was said to the member at the time and what paperwork they signed, but there may be some scope there for not revisiting non-statutory transfers, provided you can spot them of course because it's not always easy from the records to know what was statutory and what wasn't. On bulk transfers, again Lloyd's only dealt with a very narrow point, it looked at mirror image transfers, so where you were transferring DB to DB under an actuarial certificate, under the preservation ranks, and the receiving scheme is replicating those benefits in the same schemes, so there Lloyd's said well you don't need to deal with those but of course the question is what do you do about where you're receiving transfer credits in the receiving scheme, and again I think that there's still a lot of unanswered questions on those.

Simon

That's really interesting and I think there's a lot more to come from that potentially. What I'd say as well is when it comes to historic transfers specifically for individuals, there's lots of practical challenges to that as well, so making sure you can find the members and find the information that exists and I think some of our clients at the moment are trying to grapple with where's the line there, because trustees want to do the right thing but also there becomes a point of diminishing returns when you're spending a lot of money to try and track down someone that might have left the scheme 20 years ago to pay them a pretty small sum, so finding the line there is quite tricky.

Catrin

Well I think we've got a mutual client actually Simon where they

had a number of Windrush generation members who were in the scheme and then transferred back out and went back home I suppose and the trustees just aren't able to find them so I think there's definitely some practical steps, you can't do what just isn't possible and I don't think the courts expect you to.

Chris

And is there any scope for deciding not to revisit DB to DB transfer so Catrin, and I'm thinking from a legal perspective so this question might be to you, but listeners might be asking didn't the Coloroll case say that on DB to DB transfers the liability for equalisation lies with the receiving scheme, or at least that's sort of the proposition that's generally stated from that case, but there's a bit more to it than that isn't there?

Catrin

Yes, I think that's the way that Coloroll's been interpreted by schemes, but if you actually read what Coloroll said, it basically said that the receiving scheme had the liability where they've been a transferred in benefits of the member without consent, so where the members got no choice in the matter is basically how it's been interpreted, so obviously for some schemes where perhaps the members ask for a DB to DB transfer it's not quite that clear-cut and I just don't think at the moment that there's enough in Lloyd's or any other case to help with that, so again I think it's areas where trustees need to take advice and come up with a proportionate way forward.

Helen

Thanks Catrin. Just before I bring this podcast to a conclusion, just wondering if you have any final thoughts, either Simon or Catrin?

Simon

So we've talked a little bit about capacity and the availability of resources in different firms to be able to work on this and I think what I would give is a bit of a plea here that if clients are thinking about it but they've not started yet, particularly if they're moving through a journey plan towards potentially insurance or self-sufficiency point, I would definitely think about what's needed for GMP equalisation and speak to advisors because this can be a reasonably long project and giving it the time to be able to work through it in an orderly and efficient process is definitely worthwhile and can really benefit the scheme.

Catrin

I think the other takeaway I'd give is that if you've got any doubts or concerns as to the existing benefits, not GMP related, to make sure you bottom those out before you do your GMP equalisation project because there's no point topping up something that was wrong in the first place, so again, good time to get your house in order just as dashboards are coming online.

Helen

Definitely. So there's obviously lots of GMP equalisation projects ongoing, some at the early stages, some have already finished, lots to be done but plenty of knowledge out there for people to take from and to get cracking really. Thank you so much for coming on the podcast Simon and Catrin.

Simon

Thank you.

Catrin

Thanks for having us.

Helen

Thank you for listening to the Burges Salmon Pensions Pod. If you'd like to know more about our pensions team and how our experts can work with you, you can contact myself, Chris or any of our team via our website.

 

This episode is the first of our series two and in this series we'll be looking at key themes for 2022 such as consolidation, ESG, personal pensions and regulatory powers. All of our episodes are available on Apple, Spotify or wherever you listen to your podcasts. Don't forget to subscribe and thanks everyone for listening.