Spotlight on the FCA’s four Consumer Duty’s outcomes.
Outcome 1: products and services
On 25th October 2018, the High Court ruled that pension benefits need to be equalised between men and women to account for the impact of GMP (Guaranteed Minimum Pension). This has led to speculation that the way redress is calculated on pension transfers may need to change. TCC’s Head of Actuarial and Redress, Harry Eastwood, examines the issue and the potential industry impact.
What are the issues around GMP?
GMP was designed to ensure that individuals who were contracted out of the State Earnings Related Pension Scheme (SERPS) through their workplace pension scheme would receive a pension at least as good as the statutory minimum. GMP accrual came to an end on 5th April 1997.
The statutory methodology for calculating GMP can result in inequalities in a number of ways, including:
Since 2010, the Government has accepted that GMP accrued post 17 May 1990 must be equalised in line with other pension benefits, however there has been no consensus as to how this should be done.
In the October 2018 judgement, the judge concluded that scheme trustees have a duty to amend the scheme to provide GMP equalised benefits in a similar form to current benefits. The DWP is due to issue a statement on this and so far there has been no comment from the FCA.
How could this affect pension redress calculations?
The judge did not address the treatment of pension transfers out. When calculating redress on a pension transfer with relevant GMP benefits, firms will need to consider whether there is any further liability as a result of GMP equalisation, and if so, how much.
Pension transfer redress exercises currently underway may need to be put on hold, if the population involves transfers from contracted-out pension schemes, while the industry awaits greater clarity from the DWP. Alternatively, redress may be issued without allowance for GMP equalisation with advice that further redress may be due. There is a risk that proceeding with calculations where GMP equalisation is not accounted for could lead to regulatory challenge and a requirement to revisit past cases and potentially provide additional redress.
What could be the wider impact on the industry?
In the short term it’s not just the calculation of pension redress that could be affected, but the wider pensions industry.
Advisory firms may find it hard to recommend, and evidence the suitability of, a transfer if it would mean potentially missing out on additional benefits from GMP equalisation. We may see that only cases at retirement, or with no qualifying GMP benefits, proceed to transfer in the interim.
The Judge confirmed that the Statute of Limitations does not apply to GMP equalisation. Some Scheme Rules may have a clause suggesting that benefits are lost if not claimed within 6 years of becoming due. Pragmatically, can Trustees apply this limitation clause where they relate to benefits to which members didn’t know they were entitled?
We may also see a delay in schemes producing cash equivalent transfer value (CETV) quotes or longer lead times from request to delivery. However, members have a legal right to receive such quotes within two months, so schemes cannot delay for long. Alternatively, schemes may issue CETVs with a warning that members may lose equalisation if they transfer or advise that an additional CETV may be payable at a later date.
The industry awaits further guidance from the courts, DWP and FCA before amending their processes or revisiting previous cases. TCC’s pension redress experts are following this case closely, ready to provide guidance and clarity on the way forward for firms affected by this ruling once additional guidance is published.