conversion 10 steps (63)
Roderick Ramage, solicitor, www.law-office.co.uk
published by distribution to professional contacts 8 May 2019)
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does
not accept any responsibility for anything that any person does or does not do
as a result of reading it.
The judgements in the Lloyd’s Bank
case, summarised in my New Year 2019 pension law update, confirmed the
requirement to equalise GMPs and discussed the methods that might be used,
including, as method D2, converting GMPs to scheme benefits.
With a view to simplifying
pensions, the government, by the Pensions Act 2007 s14 (Conversion of
guaranteed minimum pensions), inserted sections 24A to 24H into the Pensions
Schemes Act 1993. This legislation has
hitherto been of little practical value because the government had stated during the consultation that schemes “should already have equalised
their benefits, taking account of the GMP rules”, but before the Lloyd’s Bank
case there had been no guidance on equalisation.
18 April 2019 the DWP published its Guidance
on the use of the Guaranteed Minimum Pensions (GMP) conversion legislation,
in which, in section 4 (An outline of the DWP methodology) it set out the 10
stage process which “results in the adjustment of an individual’s benefits to
compensate for post 16 May 1990 GMP inequalities as well as conversion of all
the individual’s GNP”.
summarise and comment on the key elements in each stage likely to be relevant
to relatively small schemes.
Stage 1 – Reach agreement with the employer
trustees agree with the employer in relation to the scheme that GMP conversion
is to be undertaken. Check whether the consent requirement applies to participating
Stage 2 – Select the members for conversion
and agree which benefits are to be converted and the form of the new benefits.
The GMPs, which are benefits accrued for pensionable service from 6
April 1978 to 5 April 1997, of some or all the members may be converted and
those converted need not be converted at the same time. If however the purpose of conversion is not
only the equalisation of GMPs but also the simplification of the scheme’s
administration or preparation for a buy-out, there is probably no reason not to
convert all the GMPs and do them all at the same time.
benefits to amend as part of the conversion process
It is likely that all GMPs will be converted. In the course of conversion it will be
necessary to alter all or some of members’ non-GMP benefits. The guidance refers to the benefits as
“benefits for conversion” or the “post conversion benefits”.
There will be no need to equalise rights (GMP and scheme) for service
before 17 May 1990, which can remain unequal.
Deciding the form
of the post conversion benefits
The post conversion benefits:
- must be actuarially at least
equivalent to the pre conversion benefits;
- must not include money purchase
benefits, apart from those provided under the scheme immediately before the
- must include survivors’ benefits
in accordance with the provisions of the 1993 Act and regulations; and
- for pensions in payment, the
amount of pension to which a member had an immediate entitlement before the
conversion must not be reduced as a result of the conversion.
Once conversion has taken place, the GMP rules (including the GMP
revaluation and indexation requirements) will not apply to the converted benefits.
“Normal” revaluation and indexation will apply to all (including converted) benefits.
Stage 3 – Set the conversion date
The trustees and the employer agree the date at which conversion is to
be effected (“conversion date”).
Stage 4 – Pre conversion consultation
The trustees then write to the members (or, if not all, the selected
members) to inform them of the proposed conversion and seek their views.
Stage 5 – Valuation
The scheme actuary values for each member, calculated as at the conversion
- “amount A”, the member’s and
survivor’s benefits for pensionable service during which the GMP to be converted
- “amount B”, which is the same,
but assuming that from 17 May 1990 (but not before) the member were of the
Stage 6 – Equalisation
“Equalisation” would be achieved by using a conversion value for each
member which is the higher of amount A and amount B.
Stage 7 – Conversion – determining the post
Having determined the conversion value for each member in accordance
with Stage 6, it is then necessary to turn it back into a revised pension
benefit, using an approach consistent with the Stage 5 valuation.
Stage 8 – Certification
The actuary will certify to the trustees, not later than three months
after the calculations have been completed, that they have been completed and
that the post conversion benefits are actuarially at least equivalent to the
pre conversion benefits as equalised for the effect of GMPs.
Stage 9 – Modification of scheme to effect
The trustees may resolve to effect the conversion on the agreed basis,
or alternatively, use the scheme’s amendment power to enable GMP conversion.
Stage 10 – Post conversion notifications
The trustees must take all reasonable steps to notify the members and
survivors, whose benefits have been converted, either in advance or as soon as
reasonably practicable after the conversion date. They should be told what this means in terms
of the amount and the shape of the benefit going forward. The date on which any benefits in payment
will change (or have changed) should be included in the notice.
Currently HMRC also needs to be notified on or before the conversion
date that the individual’s GMPs have been or will be converted.
copyright Roderick Ramage
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