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Out-Law Analysis 6 min. read

Pensions risk transfer: GMP equalisation and bulk annuities

The right approach to guaranteed minimum pension (GMP) equalisation compliance can help pension schemes stand out from the crowd in a busy bulk annuity market.

Schemes which are able to complete GMP equalisation before approaching the bulk annuity market are likely to appeal to insurers, as this reduces a key area of complexity and uncertainty.  Where this is not possible, trustees can work with insurers and legal advisers to ensure GMP equalisation needs are met in bulk annuity contracts.

What the High Court decided on GMP equalisation

Since the High Court issued its landmark decision on GMP equalisation in the Lloyds Bank case in 2018, schemes have been considering how best to comply with the judgment. The actions trustees take can support their aim of securing a future buy-in or buy-out

The court decided that pension schemes must equalise benefits to address the inequalities caused by GMPs. Inequalities in GMPs for men and women stem from their different payment ages of 65 and 60 respectively, reflecting the old state pension ages.

Tellwright Robert

Robert Tellwright


Those in a position to act [on GMP equalisation] in advance could make their schemes more attractive to insurers in a busy market by removing a significant degree of uncertainty and complexity

It has long been clear that schemes must treat men and women equally in relation to benefits built up from 17 May 1990. It was not so clear whether this also applied to GMPs because they flowed from the UK's state pension system. The court decided that GMPs are not exempt from equal treatment requirements.

Read more on pensions risk transfer

How should schemes achieve equality?

Trustees must address any inequality resulting from GMPs built up between 17 May 1990 and 5 April 1997. Trustees have some flexibility about how to do this, but the approach cannot be more generous to members than strictly necessary, unless the employer agrees. The court effectively blessed two main approaches, or methodologies.

A “dual records” approach

Under this approach, members continue to receive their GMPs and excess pension, but each member's benefits are regularly compared to the benefits a person of the opposite sex would have received, and the higher benefit is paid. There are variations on this approach which allow for offsetting – where the member has previously received a higher benefit due to his or her sex – and interest.

“GMP conversion”

Under this approach, a member’s GMP and excess pension is “converted” into an alternative benefit. The value of the converted benefit is calculated by an actuary in a way which aims to address the inequalities.

The best approach for trustees to take will depend on a number of factors. Trustees should discuss these with their professional advisers and administrators. Some of the main considerations may include:


Dual records

GMP Conversion
Lower upfront costs but additional ongoing administration & complexity Higher upfront costs & complexity but scope to simplify ongoing administration
Benefits are based on experience rather than actuarial assumptions  Benefits are converted using actuarial assumptions, so there can be “winners and losers” 
More difficult for members to understand their benefits Scope to simplify benefits and improve member understanding
GMP laws can restrict member options (e.g. early retirement, tax free cash) and liability management exercises. GMP requirements can be removed, more flexibility for member options and liability management exercises.
Fewer tax risks   More significant tax risks 

Preparing for a bulk annuity

Both the ‘dual records’ and ‘GMP conversion’ options are compatible with plans for a future bulk annuity purchase. Many insurers may be attracted to the idea of insuring benefits which have been simplified through a GMP conversion process. But insurers are also investing in their administration processes to accommodate the dual records approaches.

This is important, because insurers are likely to insist that GMP equalisation is completed before individual annuity policies can be issued to members under a buy-out process. This is also a necessary step to take before a scheme can be wound-up.

The steps trustees should take on GMP equalisation, when preparing for a bulk annuity

Data is important. As a rule, better data means better engagement from insurers and pricing, as well as making it easier to agree data warranties. If possible, trustees should complete a GMP reconciliation exercise, checking their scheme’s GMP records against HMRC’s, before approaching the market, and have a plan for their scheme administrator to plug other data gaps which will affect GMP equalisation calculations. It also makes sense to seek to exclude the impact of GMP equalisation from any material change clauses in the bulk annuity policy.

If a scheme’s data is in good shape, trustees may be in a position to complete GMP equalisation before they transact a bulk annuity. This won’t be the right move for every scheme, but those in a position to act in advance could make their schemes more attractive to insurers in a busy market by removing a significant degree of uncertainty and complexity. In time, we envisage insurers requiring GMP equalisation is completed and that data and benefits are stable before they provide quotations on small scheme buy-outs. This would give the insurers confidence that the scheme’s data cleansing process and the issue of individual annuity policies on buy-out will be smooth and speedy.  

To secure a bulk annuity before completing GMP equalisation, trustees should put a high level plan in place before approaching the market. Thought should be given to the messaging to the insurers, and what you plan to ask for in relation to GMP equalisation in any requested contractual terms (RCTs). Trustees able to say, for example, “We’ve reconciled our data, we think the dual records approach will be best for our scheme, we’ve discussed this with the sponsoring company and our advisers and we should be ready to implement this in the next 12 months”, will give insurers confidence that they are bringing the scheme to market in a “transaction ready” state.

Trustees should engage with insurers, who can be flexible, and there are various ways that GMP equalisation needs can be addressed in bulk annuity contracts. Trustees should have a clear, mutual understanding of what methodologies can be insured, when equalisation can be achieved, and what the associated costs and pricing basis will be. Many insurers can also offer additional cover for unforeseen risks, such as “GMP methodology cover” – which protects trustees if the method they choose is later found to be defective by a subsequent court judgment. 

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