GMP methodology pilot project completed successfully
All schemes set to transfer to PPF from June 2013 to use methodology
PPF to write to all trustees to tell them how they will be affected
Methodology fit-for-purpose and meets PPF’s legal obligations
Following a successful pilot project, the Pension Protection Fund (PPF) announced today (Wednesday) that its method of calculating compensation for men and women to ensure they are treated equally will apply to all pension schemes in its assessment period.
In 2008, the PPF confirmed that it has to take account of Guaranteed Minimum Pensions (GMPs) to ensure the equal treatment of men and woman, as required by law.
Men and woman can receive different levels of compensation because of differences in the calculation of GMPs – primarily brought about by different retirement ages.
The PPF confirmed its GMP calculation method about a year ago but decided to undertake a pilot project with selected schemes first to iron out any teething problems.
PPF’s Chief Operating Officer, David Heslop, said: “The pilot project allowed us to put the calculation method through its paces and we found that it worked as we anticipated. This means that it is fit to be rolled out to all schemes in our assessment period.
“It has been a long and complex process, involving many of our stakeholders, to come up with the most satisfactory approach for our needs and also meet our legal obligations. I would like to thank all those schemes who took part in the pilot as their efforts mean we are confident that we can apply the method to all schemes successfully.”
The PPF will tell schemes which are scheduled to transfer to the PPF before 31 May 2013 that they will not have to do GMP calculations, in line with the PPF methodology. Instead, the PPF will do these calculations and adjust compensation payments accordingly.
But for all schemes where transfer is not expected until after 1 June 2013, GMP calculations using the PPF methodology will be completed before transfer.
The PPF will be writing to the trustees of all schemes in assessment shortly to explain how these changes will affect them.
Notes to editors:
1. Copies of the document, ‘Statement on equalisation for GMPs AND the application of a Statutory Minimum to PPF compensation for schemes in a PPF Assessment Period.‘, are available on the PPF’s website:
2. Attached to this press release is a background note on why the PPF has to equalise benefits for GMP and a chronology of the consultation process.
3. The Pension Protection Fund was set up under the provisions of the Pensions Act 2004 in April 2005 and is classified as a public financial corporation. It has been established to pay compensation to members of eligible defined benefit and hybrid pension schemes when there has been a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension scheme to cover Pension Protection Fund levels of compensation.
For further press information contact: Richard Hunt on 020 8633 5931/0789 425 5561 or Ana Moreno on 020 8633 4932/ 07961 957 480
Background note on GMP proposals:
Guaranteed Minimum Pensions
- Guaranteed Minimum Pensions are a defined benefit underpin broadly equal to SERPS (the State Earnings-Related Pension Scheme) which must be provided by schemes if they contracted out of SERPS in the relevant period.
- They were introduced with contracting out in 1978, and could accrue up to 5 April 1997 when contracting out arrangements were changed.
- Both defined benefit and (otherwise) defined contribution schemes could contract out and commit to pay GMPs.
GMPs (and SERPS) are unequal between men and women for two main reasons:
- women accrue the same GMP as men, but over a shorter period (to allow for different retirement ages) – thus the “accrual rate” of a woman’s GMP is
- women are entitled to receive their GMP from age 60, men from age 65 (GMP age). If a member leaves service before GMP age, revaluation applies from that
date until GMP age.
- Rates of revaluation of GMP are different to rates of increase to GMP in payment (and often from the scheme’s own revaluation and increase rates applying to the “excess over the GMP”). This will usually have the effect (depending upon movements in inflation) that benefits which are the same for a man and a woman at the date of leaving service will move apart by their retirement age.
The 2008 consultation
- Our 2008 consultation considered how to equalise in respect of GMPs and set out four methods for doing so. (The preferred solution was modified method 2 – a partial application of method 2 (MM2)). Further detail can be found in the Appendix A in: http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/gmp_consultation_april_2008.pdf
but in summary this results in members receiving the higher of the (overall) pensions payable in respect of post 17/5/90 service to two individuals who are equal in every respect except that one is male and the other female.
The 2009 response
- Confirmed that the Board believed MM2 was the most appropriate approach to equalising benefits for the PPF.
- The response committed to exploring the best precise methodology for calculating compensation in light of the preferred method.
The 2011 consultation
- Confirmed that the Board still believes MM2 is the most appropriate approach for equalising benefits for PPF and FAS.
- Set out the method by which compensation and assistance was proposed to be calculated for the effect of equalising. Moving from a tranching to an underpin approach.
- Set out the Board’s obligations for PPF and FAS, including the change in the need for a comparator since HMG statements, and included a summary of our legal advice (without waiver of privilege).
- Set out our plans (in summary) for implementation.
The 2011 response
- Confirms that the Board will use the statutory minimum underpin approach for the calculation of PPF compensation and FAS assistance for the effect of GMPs.
- Sets out the Board’s plans for implementation, including a 6 month pilot study with selected PPF schemes and updated S1 guidance for FAS schemes.
- Provides a more comprehensive technical Statement of the underpin methodology in practice which will be used in the pilot study and for transferred schemes (following the completion of the pilot).
- Further details can be found on our website at: http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/GMP_Response.pdf
- Pilot project complete
- Methodology to apply to all schemes in PPF assessment from 1st June 2013.