How much will GMP equalisation cost?

Most DB pension schemes in the UK are likely to be affected by GMP equalisation – the recent High Court ruling that Guaranteed Minimum Pensions (GMPs) must be equal for men and women.

The costs of implementing GMP equalisation is expected to be significant. However, according to our analysis, the cost isn’t likely to be as high as initial reports suggest. In reality, we predict the total cost to UK DB will be c.£8bn* - close to half of the industry’s original predictions.

Here, we look at the implications of these costs and who will benefit from this ruling.

Implications for pension schemes

At the time of the judgment, the overall cost of providing extra benefits for GMP equalisation was widely estimated across the industry to be in the region £15bn. It is encouraging news that our analysis indicates it will be closer to half that amount. Most companies are therefore unlikely to see significant disruption to their long term funding strategies.  

While many FDs will be relieved that the impact is not as bad as first feared, we‘ve seen noticeable differences from scheme to scheme. It is important to complete a thorough assessment, especially as this extra cost normally flows through ‘profit and loss’ in company accounts. 

Looking beyond the financial impact, GMP equalisation remains one of the largest industry-wide challenges. 28 years of pension records will need to be re-analysed for millions of pension scheme members, which is likely to take significant time and resource.

So, who benefits?

The overall amount of the GMP uplift for a scheme depends on the total GMP pension that needs to be equalised for the scheme as a whole. This pension will typically have been built up between 1990 and 1997. However, after allowing for differences in total GMP pension, we’ve also seen clear differences in uplift costs due to specific scheme features.

More generous schemes i.e. those where members can get their full pension around age 60 with inflationary pension increases provided year on year on non-GMP pension, are likely to see a relatively low increase to pension liabilities. For these schemes, it tends to be females who will see the majority of the uplifts.

In contrast, schemes with higher increases to pension liabilities due to GMP equalisation, tend to have retirement ages of 65 with no pension increases provided on non-GMP pension. For these schemes males will see the majority of any uplifts.

To sum-up

It’s encouraging that GMP equalisation won’t cost as much as initially expected. But as the impact will vary from scheme-to-scheme, it’s important to carry out a thorough assessment in order to understand the implications for your specific scheme.

*Hymans Robertson’s analysis was based on a £30bn sample of UK pension schemes.