PASA Equalisation Working Group: Tax Guidance

by John Wilson   •  
Blog

The Guaranteed Minimum Pension (GMP) equalisation working group, chaired by the Pension Administration Standards Association (PASA), has issued further ‘good practice’ guidance for UK pension schemes. This highlights tax issues that schemes may encounter in adjusting benefits for GMP inequalities (GMPE) and identifies possible approaches for dealing with those issues.

For trustees and administrators this is arguably the most eagerly awaited PASA GMPE guidance. Trustees have been under a duty to address GMPE since the ruling in the original ‘Lloyds Bank case’ over two years ago.

What’s in it?

The tax guidance starts with background to the GMP inequality issue, then sets out the steps involved in a typical project plan for addressing it.

There is coverage of both HMRC newsletters on GMPE and tax issues (annual and lifetime allowances, deferred member ‘carve-outs’, lump sums and protections), as well as information on adjusting past and future benefits, including interest on and payment of pension arrears; forfeiture; reporting to HMRC; and communicating with members.

HMRC states that the information in its newsletters applies only where the reason for a benefit adjustment is “solely for GMP equalisation”. Helpfully, the PASA guidance observes that:

“The GMP Equalisation Working Group considers that there is latitude to apply the HMRC Guidance to reasonable adjustments to:

  • address deficiencies in the data (at the member or scheme benefit level);
  • operate (comparatively small) simplifications to make calculations practicable; and
  • interpret the operation of contracting out legislation and its interaction with scheme rules,

in each case where such adjustments are made solely for GMP equalisation.”

This statement is one of 16 ‘key messages’ throughout the guidance, which also includes examples; information on technical issues such as the various forms of HMRC protection and their interaction with GMPE; and template communications.

What’s not in it?

The guidance is light on the topic of GMPE and ‘conversion’, but there is good reason for this.

In particular, when it comes to tax, there are too many ‘known unknowns’; some of which it may only be possible to resolve through legislation. Some trustees have already concluded that, in the absence of a specific reason or requirement for equalising GMPs by converting them into scheme benefits, the safer option is to use a ‘year on year’ method of GMPE.

Nevertheless, there is a separate group looking at conversion and possible workarounds; for example, conversion just before, at or after retirement and the extent to which that negates or mitigates some issues.

Further guidance on conversion should be available by March or April.

Further reading

PASA Equalisation Working Group: Tax Guidance

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