Why do schemes need guidance?
At the end of October 2018, the High Court ruled that schemes must equalise benefits to address the unequal effects of Guaranteed Minimum Pensions (GMPs).
Since then, an industry-wide working group has been established and has published initial guidance. The DWP has also published guidance on how the GMP conversion legislation can be used to equalise for the effect of GMPs.
However, few schemes have actually started to equalise. One reason for this is that it has not been clear how any changes needed to members' benefits will fit with the pensions tax rules. Questions include the following:
- Will any increase count as accrual for Annual and Lifetime Allowance purposes?
- Will it trigger loss of Lifetime Allowance protections?
- Will paying or permitting the transfer of part of a member's benefits before they have been equalised result in loss of Lifetime Allowance and other protections, and or in the scheme making unauthorised payments?
New HMRC guidance
HMRC issued initial guidance on pensions tax issues on 20 February 2020.
The guidance focusses on the Annual Allowance and the Lifetime Allowance, including Lifetime Allowance protections.
Broadly, it suggests that where benefits are increased as the result of GMP equalisation, the increase will not normally count for Annual or Lifetime Allowance purposes, or result in loss of existing Lifetime Allowance protections. It will, however, be counted for the purposes of testing benefits against the Lifetime Allowance when, for example, a member retires. Payment of arrears is also dealt with.
Does the guidance apply to all schemes?
The guidance only applies to schemes which use one of the year-by-year (dual record keeping) methods for GMP equalisation, and make 'pure equalisation' adjustments.
It will not apply to schemes that want to equalise using the GMP conversion method and or to make other adjustments to benefits. For schemes considering GMP conversion, HMRC also warns that conversion could have pensions tax consequences for some members, for example, loss of "deferred members carve-out" for annual allowance purposes "or fixed protection, or both".
Will there be more guidance?
HMRC says that it is still considering other pensions tax issues, including "the treatment of lump sum and death benefit payments" and that it aims "to give more guidance on these as soon as possible as well as continue to explore the tax implications for schemes choosing to use the conversion methodology".
What does this mean for schemes?
The guidance is a helpful starting point for schemes interested in using one of the year-by-year (dual record keeping) GMP equalisation methods. However, these schemes might need to wait for further guidance from HMRC before they can proceed.
Schemes that want to use the GMP conversion method to equalise will need to wait for further guidance and see what clarification HMRC is able to provide.
What can schemes do now?
We expect that schemes will continue with their GMP reconciliation projects and take the steps to prepare for a GMP equalisation project that are recommended in the industry-wide working group's 'call to action'.
Trustees and employers will also want to look out for:
- Further announcements or guidance from HMRC.
- Further guidance from the industry-wide working group, for example on the relationship between GMP rectification and equalisation, data and impacted transactions.
- The third hearing in the Lloyds case, which should help to confirm the extent to which trustees need to revisit past transfers out. This hearing is currently expected to take place at the end of April or beginning of May 2020.
- Any indication from the Department for Work and Pensions that it will make planned changes to the GMP conversion legislation.
Osborne Clarke comment
HMRC warned last year that the first guidance note would not address all of the pension tax questions that arise in connection with GMP equalisation. We welcome the clarification that the note brings and suggest that trustees and employers discuss the guidance, and next steps, with the advisers who are helping them with their GMP equalisation project.