Improved funding has allowed more pension schemes to buy bulk purchase annuities (BPA). This is helping the pension risk transfer (PRT) market reach another record year. However, there is one challenge to this progress: GMP equalisation.
Previously, schemes might have been willing to tackle GMP as part of the overall risk transfer process. However, with the allure of faster buy-in deals, many are, understandably, prioritising speed and bypassing the GMP equalisation hurdle.
However, doing GMP equalisation work during the buy-in stage of bulk annuity transactions can create backlog risks. This could delay schemes from completing buyouts on time, especially if they are also doing important data cleansing work. Buyout, issuing individual annuity policies to members, and winding up the scheme all depend on completing GMP equalisation work.
GMP equalisation is the process of adjusting benefits in defined benefit pension schemes to remove historical inequalities between men and women. These differences stem from the way Guaranteed Minimum Pensions were originally calculated, reflecting different State Pension ages at the time. Following court rulings, schemes must now review and, in some cases, recalculate benefits to ensure members are treated fairly and receive equal value, regardless of sex.
GMP equalisation has become one of the biggest data and calculation challenges in pension risk transfer. Before a scheme can move to buy-in or buy-out, benefits must be fully equalised and verified, ensuring members’ entitlements are accurate.
For insurers, this is about risk, they need confidence that liabilities are correct before pricing or taking them on. For schemes, unresolved GMP issues can delay transactions, increase costs, and create uncertainty around data quality.
Addressing GMP equalisation early helps schemes move through the de-risking process faster, with cleaner data, fewer queries, and greater certainty for all parties involved.
GMP equalisation by its very nature involves intricate calculations, multiple stages and data interrogation and analysis to ensure entitlements are accurately reflected in the buyout price. It’s typically a time-consuming and laborious exercise and, in some cases, can take well over a year to finalise. For schemes ready and eager to secure full buyout and individual policies today, a lengthy delay to complete GMP equalisation is far from ideal.
From an insurers point of view too, they are understandably hesitant to take on the added workload associated with GMP equalisation due to the potential scale of the task and associated cost implications. In an ironic twist, this creates a situation where the very process designed to protect pensioners' benefits can become a roadblock to a desired securing of benefits with an insurance company.
Where schemes have not taken the lead to address GMP equalisation, insurers will reflect the additional workload and risk in charging a higher premium. Schemes must weigh the cost of undertaking GMP equalisation work with the benefits of a smoother transaction and potential lower than otherwise insurance premium.
There are solutions entering the market that enable schemes to factor GMP equalisation work into the pension risk transfer process: solutions that can dramatically reduce the time required to complete GMP equalisation work at scale.
Being able to automate and efficiently tackle GMP equalisation, without compromising accuracy, will allow schemes to experience significantly reduced project timelines. This translates to lowering time costs, faster buyout completion and achieving their PRT endgame in the desired timeframe.
Stakeholders benefit from the above: Trustees and advisors can focus on value-adding BPA negotiations and structuring and there is reduced administrative burden. An efficient GMPe solution will be welcomed by insurers as it will bring greater clarity on a scheme’s preparedness.
This will help insurers to develop more favourable risk-reward propositions, creating a more attractive market for everyone involved. Addressing the GMPe remediation work is essential for achieving successful outcomes.
As the BPA market continue to be buoyed by a strong talewind, staying ahead of challenges like GMP equalisation is crucial.
Ready to simplify your GMP equalisation journey? Discover how Heywood’s data and calculation technology supports accurate, compliant outcomes. Explore our GMP equalisation solutions