The Government has published further guidance on how pension schemes should deal with the equalisation of Guaranteed Minimum Pensions (GMP).
This follows a high court ruling that schemes must equalise these benefits between men and women, after a case was brought by three women who were members of the Lloyds Pension Scheme. They argued that their benefits had been increased at a lower rate than men of the same age.
This ruling affects schemes where members were contracted out of the State Earnings Related Pension Scheme (Serps) between May 17 1990 and April 5 1997.
The guidance, from HMRC, supplements existing technical advice on the different methods available to schemes to conduct this equalisation process.
HMRC says it cannot comment on the choice of methodology used by scheme to achieve this equalisation.
This latest guidances relates to those equalisation methods whereby a dual record keeping approach is used, but does not apply where a conversion method is applied. Tax experts say HMRC had applied a “pragmatic approach” when looking at issue raised by this dual record keeping approach.
The guidance indicates that members who have benefited from the fixed protection of a lifetime allowance should not lose this, if their firm is adopting this dual record keeping approach.
However it raises the prospect that those who are members of schemes that are using a conversion approach could face unexpected tax bills, if any uplift to their pension means they breach lifetime allowances.
HMRC states: “For pension schemes wanting to use the conversion method, a method that converts scheme benefits into a new form of benefit, there may be consequences for some members if this method is applied.
“For example, converted benefits through a higher revaluation or higher rates of pension in the year of conversion, and in subsequent years beyond conversion, which may result in either the loss of deferred members carve-out or fixed protection, or both.”
HMRC says it will continue to consult with an industry working group on the pension taxation issues associated with the equalisation of GMPs but not included within this latest supplementary guidance.
This includes the treatment of lump sum and death benefit payments. HMRC adds: “ We aim 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.”
LCP partner Steve Webb adds: “This announcement from HMRC is good news but still leaves important questions unanswered. It means in particular that people who had benefited from fixed protection of their lifetime allowance should not lose that protection if their scheme is tackling the GMP equalisation issue in one of a set of ways known as the ‘dual records’ methods.
“But for schemes considering tackling this issue through GMP ‘conversion’ there is still no clarity about the position of members on protection or other wider pensions tax concerns. Although these are complex issues, we do need HMRC to provide reassurance or solutions as soon as possible, not least because resolving this issue could help schemes in other ways, including moving ahead with plans to buy out liabilities.”
Hymans Robertson head of GMP equalisation Matt Davies says: “The industry will be pleased that HMRC are looking to take a fairly pragmatic approach on GMP equalisation, recognising GMP equalisation relates to benefits built up before the current pensions tax regime was conceived.
“There will be still some complexity, which will leave some taxpayers scratching their heads, such as being asked to give retrospective lifetime allowance adjustments.
“Many early adopters for GMP equalisation are focusing on a conversion method for equalising GMP, which HMRC are still looking at.
“We know that insurers also have a strong preference for this method and may allow it to influence their willingness to undertake a buy-in or buy-out with a scheme.
“We hope that HMRC will take a pragmatic approach when they come to issue guidance here, that does not cause tax problems for pension scheme members based on events entirely outside of their control.”
