APTIA PENSIONS ADMINISTRATION POD EPISODE 4

John Wilson, Head of Pensions Technical, Aptia  

Hello, and welcome to the latest edition of the Aptia Pensions Administration Pod. I’m John Wilson, Aptia’s head of pensions technical, and this episode of the podcast is all about GMP equalisation and Lloyds 3, why it's time to draw a line under this long running saga and, more importantly, how to do it. 

We're covering GMPE and Lloyds 3 in light of a recent pension ombudsman determination that has left pension schemes with no more excuses for delays on this issue, and there are plenty of other strategic reasons to get on with it too. I'm delighted to be joined by Terry Wharton, our head of projects, whose job includes overseeing a specialist team at Aptia that is helping pension schemes address GMPE and Lloyds 3 right now. Terry, thank you very much for joining me to discuss this important subject.  

Terry Wharton, Head of Projects, Aptia 

Thank you for having me, John. I'm happy to be here today to talk about Lloyds 3. As you say, it's a topic that I very much want to raise the awareness of with trustees. I've written a number of external articles on the topic already this year, so a chance to talk with you today and raise awareness further is really exciting. 

As you say, at Aptia my team works on GMPE, we work on Lloyds 3 and we also work on how those projects fit into derisking journeys, how we work them into data, clients’ plans, etc. So yes, look forward to chatting with you today, John.  

John 

Thanks, Terry. Look, unbelievably, it's seven years now since the first Lloyds ruling, October 2018, and nearly five years since the Lloyds 3 judgment, 20 November 2020. So it's long overdue, I think, for us to take stock, look at progress that's been made, or maybe rather lack of it, in GMP equalisation and Lloyds 3 in particular – and maybe discuss most importantly how we get this work done now, draw a line under it and put this particular issue in our rearview mirrors. 

But I'm maybe getting a little ahead of myself. Maybe we should start by reminding our listeners just what GMP equalisation, or GMPE for shorthand, is all about and where Lloyds 3 fits in. So Terry, do you want to pick up the narrative from there? 

Terry 

Yes, of course, John. Before we get into the equalisation of these pension scheme benefits, a quick recap on the history of what the benefit is and how long-standing an issue that's been in the industry would be really helpful. 

So, Guaranteed Minimum Pension, or GMP, was introduced a long time ago. The reason it was introduced was to help ensure that members of pension schemes that were contracted out of the state pension scheme between 1978 – yes, 1978 – and 1997 receive a benefit intended to be at least as good as the state benefit that they were contracted out of. A question I get asked all the time, but not to be done in detail today, is why did schemes contract out? And in a nutshell, it was in return for lower national insurance contributions. So it looked like a cost-saving play at the time. 

There’s lots of debate about whether it was good value or bad value. Anyway, the key point here is that the rules of this GMP benefit, in terms of the accrual rates and the payment ages, were different between men and women. So this whole inequality story goes back decades. 

The first significant and recent milestone toward resolving those inequalities between men and women was in October 2018. Lloyds Bank took a case through the courts, and the High Court ruled ultimately that pension schemes must equalise Guaranteed Minimum Pensions between men and women. 

That first ruling did leave some loose ends and therefore led to a number of subsequent rulings. In terms of the primary topic for today, Lloyds 3, it was around two years later, November 2020, and the third Lloyds High Court ruling, hence the name Lloyds 3. 

In that ruling, the court determined that past transfers from schemes should be part of GMP equalisation, but with was no time bar on trustee duties to pay top ups, and that transfers since 17th of May 1990, i.e. the Barber date, are all potentially within scope of that ruling. Does that help, John?  

John 

It really does. I think that helps really set the scene, and we should probably get into what it is that schemes are doing now. So can you kind of bring us up to speed on where we are on GMP equalisation projects, Lloyds 3 in particular, and just what progress is being made?  

Terry 

In summary, the answer is not enough, particularly given we are coming up to the five-year anniversary of that ruling in November 2020. Some schemes are certainly starting to make plans or progress the implementation of GMP equalisation for the current membership, but Lloyds 3 seems to be the poor relation of dealing with inequalities in the current membership. 

Lloyds 3 deals with ex-members and seems to be therefore lower down to-do lists. I would say that we're starting from a low ebb, but momentum is building. At Aptia we're working with our clients to engage with them, ensure they understand how progress can be made, and work with them to put those plans in place and ensure that we are removing these inequities so they don't cut across plans that the schemes have got in terms of derisking journeys, etc. 

I'd say at Aptia we are ahead of the market in terms of the number of Lloyds 3 projects we are currently working on and have in the pipeline. We've got a bank of experience of how to do these projects properly and perhaps we can touch on that in a bit more detail later.  

John 

I think that would be useful. But let's just pause there. You know, this is an important issue. This is about paying the right benefits to the right people at the right time. So I'd like to look a little bit under the bonnet and just say what's the reason for the delay, or are there a number of reasons?  

Terry 

I would say there are three primary reasons, so let me talk you and the listeners through those. 

Firstly, GMPE has been around for so long that I think we've almost become a bit desensitised to it or certainly some parties have. We fall into a pattern of talking about GMPE forever, and especially Lloyds 3. It's competing on trustee agendas that are already filled with triennial funding discussions, scheme closures, investment projects, and derisking projects. And because this relates to ex-members of the scheme, there's certainly a mindset that ex-members are less important to deal with than current members when in actual fact both populations and members originally worked for the same employer or the same group of employers that sponsored the scheme 

The second reason is there’s potentially a bit of conflict in terms of advisers in the market, because Lloyds 3 is not always the most lucrative project to be talking to your client base about. There's more money to be made elsewhere sometimes. So trustees just need to be mindful of that. Trustees should be prioritising it and pushing this onto agendas, even if it's maybe lower down their advisers’ agendas. 

Lastly, there's a bit of a myth around the practicalities of Lloyds 3 that says you need to do GMP equalisation or complete GMP equalisation for your current membership before you then tackle your ex-membership. And the way I answer this question, John, and the I challenge this is: Do you really want to complete and go through one GMP equalisation exercise for your current membership and then start another GMP equalisation project for your ex=membership, who've transferred out of the scheme. And the answer is always obviously no. 

At Aptia we've got the experience to work with clients to run the two projects in parallel as part of a part of a programme, and put controls in place to make sure that populations are understood and there's no double counting etc. So we've built that experience and we challenge that myth every time it comes up. So those are my top three reasons. 

John 

That's really useful. So we've talked about the delays and the reasons for them. Maybe now we should turn to why we're doing this podcast at this particular time and why now is the time to get on with GMPE and Lloyds 3 and get this work finished. I understand there are a number of drivers and the Pensions Ombudsman has started to look at this area and the regulator has started to look into it too. We've got pensions dashboards and connection deadlines coming up and schemes having a number of strategies. Do you want to talk about the reasons for getting on with GMPE, putting that behind us and getting on to things which for many trustees, employers and members might be more rewarding.  

Terry 

Those items you listed are really important, so let me go through them in turn and I'll add a few other thoughts around the member’s perspective. If I start with the ombudsman, earlier this year there was a really interesting complaint that was [partly] upheld by the Pensions Ombudsman. Trustees should be aware of this and take note of this case, so I'll provide a brief summary. 

The judgment was one of the ombudsman's first on Lloyds 3 and concerned Mr N, who had transferred from the scheme previously. Subsequently he enquired about the scheme's plans for GMP equalisation and then ultimately raised a complaint that the scheme had no credible plans for completing the equalisation of his transfer payment. While the ombudsman ruled there's no legal obligation for schemes to complete GMP equalisation by a certain time, it also laid down a really strong marker that unnecessary delays are not acceptable, and the equalisation should take a reasonable period of time. 

Ultimately Mr N was awarded £500 for distress and inconvenience, so not a huge sum. But it's an interesting marker that could potentially be read as the ombudsman taking a stance that the five years that have passed since the Lloyds 3 judgment in 2020 is now starting to stretch what it interprets as reasonable. 

Other members and their advisers surely will have noted this ruling, and of course the Pensions Regulator. So enquiries, complaints and interest from the regulator are only going to go in one direction if trustees don't start to deal with GMP equalisation and Lloyds 3.

 The second one you mentioned is really valid: pension dashboards. I've been asked a number of times, and particularly for Lloyds 3: What has pensions dashboards got to do with Lloyds 3 and why should we get on with it? 

Firstly, the Pensions Regulator started to contact trustees over the summer to request evidence from them regarding their readiness for dashboards, including what they are doing and their plans for their member data. So that's evidence that the regulator is increasingly interested in the quality of scheme data. 

And an inequality in a pension scheme is arguably a data issue that needs to be rectified. The regulator taking that action over the summer might be an indicator that the regulator would be more interested in and intervene in scheme data matters in future. 

Secondly, while Lloyds 3 relates to members who have transferred out of a particular pension scheme, dashboards is a huge initiative in the UK. Members in their droves are going to be encouraged by the dashboards programme to start searching for their old pension benefits and reviewing their old pension benefits. This is going to lead to an increase in enquiries and contact traffic, including transferred-out benefits. So those are the two main reasons that I see the dashboard will drive contact into trustees regarding Lloyds 3 and pose a risk of complaints. 

The third topic you mentioned, John, was strategic goals - and the best example that we see of this at Aptia is trustees trying to push ahead with derisking or insurance transactions. Where potential liabilities in the scheme inequalities, including GMP equalisation, have not been well understood, assessed or resolved in that situation, insurers can be reluctant to price for a transaction, or where they will price for a transaction they’ll adjust their price upwards accordingly. And that adjustment often exceeds the cost of having completed the GMP exercise in the first place. 

So projects can come to a practical halt because there isn't time to complete the work late in the day or a simple financial blocker where the insurer's price is prohibitive to progressing with the transaction. We've helped schemes resolve situations like that where Lloyds 3 is the blocker late in the day, but the risk and stress is unnecessary and there is simply not always time to complete that work before the insurer’s guaranteed pricing expires, for example. So GMP equalisation needs to be built into derisking journeys at an early stage. Secure the capacity with your administrator and build those plans in to ensure all the loose ends are dealt with before the business end of an insurance work stream. 

The last reason, and I would say the most fundamental, is the members. Let's put members first. They've waited a long time to have these inequalities rectified. Yes, it's true that for many members, the uplift in their benefits will be small, but our experience is that that some of the adjustments members will be due will be more substantial. And until the data is reviewed and assessed, and that side of the work is completed, the volumes of members that might be affected in your scheme and the amounts that might be involved through individuals are unknown. A legal review doesn't flush those answers out, so we can help trustees answer those questions that really help understand the impact on your members. As I mentioned earlier, the pensions dashboard is likely to drive complaints from members and contact from members, and the ombudsman has set a precedent, including how it dealt with Mr N's case. So that's four good reasons why we need to get on with this.  

John 

So we have the ombudsman, the regulators, legislative requirements like dashboards, strategic goals of pension schemes and most importantly members, who have waited long enough for what are ultimately their pension entitlements. 
We need to make progress with this. Could you say a little bit about why we can help at Aptia and how we are getting trustees towards and ultimately across the finish line on GMPE and Lloyds 3.  

Terry 

We've got a specialist team here that work across derisking, dashboards data cleanse, GMP and Lloyds 3. So our teams work together and we've got experience of building project plans to suit individual trustee or pension scheme journey plans and requirements. 

The experience we've built means that we can often progress Lloyds 3 in parallel with other workstreams within that journey plan or programme, so that the total end-to-end delivery time of the derisking journey – going on-risk with the insurer, for example – we can often bring that in. And the way we run a Lloyds 3 project means that we do that in a light touch way in terms of the demands on trustees. Yes, there are key milestones where we need trustees input but we're mindful that during a derisking journey, all those bigger, more important aspects – well, seemingly more important aspects – of the derisking journey are going to take up a lot of trustees’ time. So we work in a way that's in parallel, light touch and allows trustees to keep things moving without taking too much of their capacity. 

Our experience also means we know how to keep projects moving once we're up and running, and so that we deal with members sensitively. A Lloyds 3 project can be stop-start. There's likely to be steps in the project where we have to trace members, for example, and we've got experience of and approaches to make that as efficient as possible. When we then contact these members, we often find that they are wary of contact out of the blue, and rightly so, because we live in an age where pension scams are pretty are pretty frequent. 

There are really practical things. The name of the pension scheme might have changed over the years, so we might be contacting members who, as a group, don't all recognise the same pension scheme. Our experience at Aptia and our scale enables us to make a project fit with the trustees’ wider plan and work with the other third parties to get the job done. 

John 

It does seem that we have the people and the technology there to try and make as much a virtue out of this necessity as possible. Summing up, is there any final message that you would leave for our listeners in terms of GMP equalisation generally and standing ready to help trustees?  

Terry 

In a nutshell, the direction of travel is that schemes and trustees need to get on with Lloyds 3. There is no escaping that. On the one hand, we have the members and the Pensions Ombudsman who are increasingly frustrated with the delays in terms of their benefits being equalised. On the other hand, we've got the trustees and employers who increasingly want to get on with moving pension schemes off the balance sheet and derisking. They need to be getting on with Lloyds 3 and planning for it so that so that Lloyds 3 doesn't become a practical barrier or a financial blocker. 

So, interests are all aligned and it's been seven years since the original ruling in 2018, and five years since the Lloyds 3 ruling, so we just need to push this up agendas. At Aptia we’ve got the capacity and expertise to support trustees. We're getting on with this, and we can help you complete the work in an orderly fashion alongside other activities and do that with minimum demand trustee board’s time. 

And lastly, John, we owe it to the members. This inaction in terms of rectifying their benefits is unfair and the passage of yet more time, if we don't get on with it, only increases the amount of work required when you eventually get to Lloyds 3 because more unpicking is required of older and older records, and contact becomes harder and harder. So let's get on with it.  

John 

I think that really does sum it up. The bit that really resonated for me is: GMP equalisation projects – we have to get this done. We owe it to our members. Thank you very much for your time and insights today, Terry. 

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