On your marks for GMP equalisation!
Have you delayed a decision on how to equalise pensions for the effect of unequal guaranteed minimum pensions because you didn’t know what the tax treatment of uplifts to pensions would be? HMRC has issued its guidance on how it will treat certain payments relating to GMP equalisation, which means most unequal past payments of pension can now be fixed. This also means that pension scheme trustees should step up their project planning to ensure they can properly consider and start implementing their preferred method of GMP equalisation.
There remains significant uncertainty on tax and other areas where trustees wish to consider converting future GMP payments to other benefits but, at the moment, the Government seems to have other fish to fry. We look at the approach HMRC has taken so far to equalisation of GMPs and what you can and can’t do now.
The High Court decision in Lloyds Banking Group Pensions
Trustees Ltd v Lloyds Bank plc in 2018 confirmed that trustees
must equalise overall pension benefits as between men and
women to correct the effect of unequal underlying GMPs.
That means trustees of formerly contracted-out schemes are
currently in breach of trust for not having paid correct benefits
in the past.
Many trustees and scheme administrators have been grappling
with the practical application of that judgement amidst worries
that actually fixing past payments, or changing future benefits,
would create unwanted tax charges for members out of all
proportion to the uplift for equalisation.
Over the past few months, HMRC has published two
newsletters setting out its approach to the tax treatment
of GMP equalisation. The guidance does not apply to any
conversion of future benefits into something simpler, but does
still cover all corrections for past underpayments. Mostly the
guidance is helpful. However, HMRC’s approach in relation to
previous trivial commutation lump sums may pose significant
Lifetime allowance and annual allowance
The February 2020 newsletter looked at the effect of GMP
equalisation on scheme members who have lifetime allowance
protections or who need to remain outside the annual
allowance provisions (for example, members who fall within the
deferred member carve-out).
The good news is that, even if GMP equalisation leads to
members getting a higher pension at retirement, HMRC does
not consider that this increase is a new entitlement for the
purposes of the post-2006 tax regime. It results from a period
of membership between May 17, 1990 and April 5, 1997.
As a general rule therefore, GMP equalisation benefit
adjustments, on their own, will not constitute a new accrual of
benefit which needs to be tested for the purpose of the annual
allowance or which might cause members to forfeit their
lifetime allowance protections.
However, GMP equalisation adjustments may still affect the
amount that trustees should declare for lifetime allowance
purposes at the various benefit crystallisation events in a
member’s life. That means updating information given in
BCE statements on previous benefit crystallisation events.
Past and future payment of lump sums
In its July 2020 newsletter, HMRC looked at past and future
payment of lump sum benefits. These are more complicated.
There are two key statutory criteria applying to the payment
of various different lump sums which HMRC has had to
- Any requirement to extinguish a member’s or dependant’s rights.
- Any limits on amounts which apply to particular lump sums.
Tackling past lump sums that had to extinguish a member’s or dependant’s rights
Some types of lump sum can only be paid if the payment
extinguishes the member’s or dependant’s rights under the
scheme or arrangement. This applies, for example, to serious ill
health lump sums, trivial commutation lump sums and “small lump
sums” (various lump sums of £10,000 or less).
GMP equalisation benefit adjustments may result in a member
getting a further entitlement in the scheme after having already
had one of these lump sums. This could have rendered the
previous payments unauthorised because the previous payment
hadn’t, in retrospect, wiped out all the member’s rights.
However, HMRC has found a way out. HMRC expressly states
that “the lump sum will not stop being an authorised payment
purely because, due to GMP equalisation, further entitlement is later
identified that the scheme administrator could not reasonably
have known about at the time of the lump sum payment”.
We have known GMP equalisation was required since
October 2018, but HMRC takes the view that until the trustee
has selected and adopted a particular GMP equalisation
methodology, the scheme administrator still doesn’t reasonably
“know” what a member’s entitlement is. So the administrator
can continue to pay out these lump sums without equalisation
until the point at which the methodology is selected and
implemented. That said, paying out a second, even smaller,
lump sum later to honour the member’s equalisation rights will
be fiddly and could be disproportionately expensive, so trustees
may still prefer to hold back on small lump sums where there
a later equalisation uplift seems likely. Serious ill health lump
sums remain the exception to that objection, where the priority
is to support the member at a difficult time.
Tackling past lump sums which had payment limits
Some lump sums, for example small lump sums, winding up
lump sums and trivial commutation lump sum death benefits,
have a fixed limit on the amount that can be paid out. The exact
limit depends on the type of lump sum and when the payment
was made, as some of the statutory limits have changed
HMRC’s view is that the payment limit applies to the amount of
lump sum that was actually paid. This means that provided the
payment was within the statutory limits at the time, a payment
will not become unauthorised just because further entitlement
is identified later during the GMP equalisation process.
However, the position is different in relation to trivial
commutation lump sums, where the limit isn’t based on
the amount of the payment, but rather on the value of the
member’s pension rights under all registered pension schemes
on a certain date. Again, these limits vary depending on when
the lump sum was paid. From March 27, 2014, onwards, the limit
has been £30,000.
HMRC’s approach is that, because GMPs accrued before April
6, 1997, the value of the member’s pension rights under all
registered pension schemes on the relevant date included the
equalised GMP rights. This means that if, because of the GMP
equalisation process, the administrator finds that, in retrospect,
the value of the member’s pension rights under all registered
pension schemes was above the limit on the relevant date, the
payment could not have been a trivial commutation lump sum.
Unless the payment qualified as a different type of lump sum,
the payment will have been unauthorised.
Exactly how you deal with this potentially some years after
the fact is unclear. GMP equalisation uplifts may have
applied to the member from several schemes. Trustees and
administrators may not have the necessary details to unpick
previous trivial commutation lump sum payments to find out
if they were unauthorised and deal with the tax implications,
where relevant. It may have to be a case of contacting the
member and asking them, as part of the process of delivering
any uplift. Trustees should seek advice on how to approach this
issue within the context of the GMP equalisation process.
Paying out “top up” payments
Where administrators identify further entitlements which
they need to pay out, the “top-up” payment must satisfy the
relevant conditions at the time the new payment is made. The
conditions applying at the time of the original payment are not
relevant. This may mean that the “top-up” payment cannot be
an authorised payment or alternatively that it is a different form
of authorised payment.
Trustees and administrators should ensure that any “top up”
payment they make to members or dependants satisfies the
relevant statutory conditions at the time they pay it out.
HMRC’s guidance is helpful in clearing away some of the
potential issues arising from GMP equalisation. However the
position concerning the past payment of trivial commutation
lump sums is likely to create significant administrative issues for
schemes which have routinely paid out this type of lump sum in
Guidance on the tax treatment of conversion seems a long
way off – trustees should take legal advice on ways to mitigate
the risk for members if targeting conversion in the immediate
We are also currently waiting for the judgment in the further
instalment of the Lloyds Banking Group case, which will
hopefully tell us who is responsible for past transfers out and
whether trustees are protected by the statutory discharge. It
sounds as if the judgment may be some time off yet, but that
doesn’t stop trustees and administrators working through the
equalisation process for members who do not have transfer
credits, and for benefits unconnected to those transfers.