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GMP Equalisation and Conversion. Russell Laver 28 November 2013. Agenda. GMP Reminder Equalisation Timeline GMP conversion Questions/Discussion. Guaranteed Minimum Pension (GMP). GMP – minimum pension for employees who were contracted out of SERPS between 6 April 1978 and 5 April 1997.

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GMP Equalisation and Conversion

Russell Laver

28 November 2013

  • GMP Reminder
  • Equalisation Timeline
  • GMP conversion
  • Questions/Discussion
guaranteed minimum pension gmp
Guaranteed Minimum Pension (GMP)

GMP – minimum pension for employees who were contracted out of SERPS between 6 April 1978 and 5 April 1997.

Broadly equivalent to the amount the member would have received had they not been contracted out.

GMPs are unequal between men and women.

Inequalities mirror those of SERPS:-

  • Different pension ages – Males 65, Females 60
  • Rates of revaluation/increases differ
  • Females enjoy a higher accrual rate

Barber Case – UK Pension Schemes have to pay equal benefits to men and women from 17 May 1990

Most final salary schemes have not equalised GMP

equalisation timeline
Equalisation Timeline

January 2010

  • Angela Eagle, the then pensions minister, announced that the DWP had received legal advice that GMPs earned after 17 May 1990 should be equalised.

January 2012

  • DWP issued a consultation on the matter.
  • Included some draft regulations to amend the Equality Act 2010 (trustee equal treatment) and the Pensions Act 2004 (PPF compensation)
  • Issued a possible method for equalising GMPs – although made it clear this method would not be legally binding. This method received criticism for administrative burden and overly generous approach.

April 2013

  • DWP issued an interim response to the consultation stating it would not publish any further proposals on GMP equalisation until spring 2014.
  • Reiterated that they remained firmly of the view that GMPs must be equalised.
dwp proposed methodology
DWP proposed methodology

Two calculations for each GMP payment

  • Existing calculation
  • Calculation of GMP of the opposite sex

The highest figure at each date a payment is due is taken to be the correct GMP

gmp conversion
GMP Conversion

Put simply……. Convert a GMP benefit into a non GMP benefit

GMP conversion could be used alongside GMP equalisation and could be used to provide clarity on GMP benefits and reduce future administrative costs.

Section 14 of Pensions Act 2007 allows schemes to amend their rules to convert GMPs into ordinary benefits subject to a few requirements.

Process for GMP conversion exists in sections 24A to 24H of the Pension Schemes Act 1993.

gmp statutory conversion process
GMP Statutory Conversion Process

Section 24B – The 5 conversion conditions

Post conversion benefits must be at least ‘actuarially equivalent’ to pre conversion benefits

If in receipt of pension then no reduction

Cannot convert into money purchase benefits

Must provide survivors benefits

Must comply with the procedural requirements of section 24E

actuarial equivalence
Actuarial Equivalence

Regulation 69A of Contracting Out Regulations 1996 gives some guidance for trustees

  • Should take advice from the Scheme Actuary
  • Should instruct actuary to calculate values pre and post conversion
  • Obtain certificate from actuary confirming actuarial equivalence

Actuary calculates the post conversion rights ignoring:-

  • Benefits which have been commuted
  • Amounts already paid
  • Amounts due to be paid before conversion
  • Discretionary benefits which may be paid in the future
survivors benefits on conversion
Survivors benefits on conversion

Section 24D states after conversion spouse entitled to:-


50% of pension earned between 6 April 1978 and 5 April 1997

Widowers or civil partners

50% of pension earned between 6 April 1988 and 5 April 1997

procedural requirements
Procedural Requirements

The employer must consent to the GMP conversion in advance.

Trustees must take reasonable steps to consult earner in advance

Trustees must take reasonable steps to notify all members and survivors affected by the conversion before or as soon as is reasonably practicable after the conversion date.

HMRC must be notified on or before the conversion date

amending the scheme
Amending the Scheme

Section 24G - Trustees of an occupational pension scheme may by resolution modify it so as to effect GMP conversion.

Amendments are outside of section 67 of PA 95.

Trustees can convert GMP under the scheme before completion of a winding up.

If conditions of section 24B not satisfied the Pensions Regulator has the power to void amendments.

gmp conversion1
GMP Conversion

Draft legislation due in 2014 may highlight the role of GMP conversion.

Helpful for schemes which are winding up.

Can be used to reduce administrative burden and cost.

Increased member flexibility.

Makes benefits easier for members to understand.

Pensions Accounting – FRS 102

Murray Wright

28 November 2013

  • Introduction to FRS 102
  • Scope
    • Accounting standards
    • Section 28
  • Transition
  • What has changed?
    • Expected return on assets
    • Plans with more than one employer
    • Recognising a pension asset
    • Disclosure requirements
    • Terminology
  • Actions
  • Questions
introduction to frs 102
Introduction to FRS 102

What does it replace?

Existing Financial Reporting Standards (FRSs)

Statements of Standard Accounting Practice (SSAPs)

IFRIC interpretations (where appropriate)

This includes FRS 17

What is FRS 102?

  • FRS 102 ‘The Financial Reporting Standard Applicable in the UK and Republic of Ireland’
  • A single financial reporting standard
  • Derived from International Financial Reporting Standards
  • Section 28: Employee Benefits is relevant to us
scope accounting standards
Scope – accounting standards

Listed companies in the European Economic Area (EEA)

Required to apply EU-adopted IFRS (i.e. IAS 19) for consolidated financial statements

Listed companies with no subsidiaries may use UK GAAP

Includes those companies listed on the Alternative Investment Market (AIM)

Unlisted companies and subsidiaries of listed companies

  • Required to apply FRS 102
  • Can ‘opt-up’ and choose to apply EU-adopted IFRS
  • Choice impacts on the whole of the company accounts, not just the pension note
  • ‘Small’ entities (as defined by companies legislation) may be able to apply The Financial Reporting Standard for Smaller Entities (FRSSE)
scope section 28
Scope – Section 28

“Employee benefits are all forms of consideration given by an entity in exchange for

service rendered by employees”

  • Post-employment benefits
    • Benefits payable after the completion of employment (exc. termination / short-term benefits)
    • Includes retirement benefits and other post-employment benefits, e.g. medical care
  • Short-term employee benefits
    • Employee benefits that are expected to be settled wholly within a year
    • Includes salaries, paid annual and sick leave, profit sharing, bonuses and non-monetary benefits
  • Termination benefits
    • Benefits provided in exchange for the termination of an employee’s employment
    • Can interact with settlements / curtailments
  • Other long term employee benefits
    • Everything else! Includes long-term paid absence, long-term disability benefits, deferred remuneration.


Mandatory for accounting periods beginning on or after 1 January 2015

Early application allowed for periods ending on or after 31 December 2012

Early adoption applies to the whole of the accounts

Comparative disclosures

  • On adoption the comparative financial statements must be restated to be in line with FRS 102
  • For example, a company with a year end of 31 December 2015 will have to show FRS 102 compliant comparative disclosures for the year ending 31 December 2014.
  • Balance sheet, profit or loss etc will need to be recalculated
  • First FRS 102 statements will need to describe the impact of the change on the accounts
what has changed expected return on assets
What has changed? – Expected return on assets

Under FRS 17 the cost of a defined benefit plan consists of the:

  • Interest cost on the liabilities
  • Expected return on assets

Net impact is recognised in profit or loss

FRS 17

FRS 102

  • Consistent with changes to IAS 19
  • Expected return on assets no longer used
  • Financing item replaced with the ‘net interest’
  • Interest on assets and liabilities is calculated using the (corporate bond related) discount rate
  • Actual asset allocation is ignored
  • Will tend to have a negative impact on profit or loss
what has changed plans with more than one employer
What has changed? – Plans with more than one employer

Use full defined benefit accounting unless “unable to identify its share of the underlying assets and liabilities in the scheme on a consistent and reasonable basis”

The multi-employer ‘exemption’ was widely adopted

Could avoid recognising share of surplus / deficit

Accounted for defined benefit pensions on a defined contribution basis

FRS 17

Group plans

  • A ‘group plan’ is a plan where all of the employers are under common control (e.g. a parent and its subsidiaries).
  • Defined benefit cost needs to be recognised
    • In the parent company accounts (other group entities account on a DC basis)
    • Spread between the participating employers if there is an agreement or policy charging the cost
what has changed plans with more than one employer1
What has changed? – Plans with more than one employer

Many multi-employer plans will need to show a pension liability for the first time

Potential for bank covenants to be breached

Negotiation of recovery plans now even more sensitive

Multi-employer plans

  • A ‘multi-employer plan’ is a plan used by employers that are not under common control (e.g. industry wide plans)
  • If sufficient information is available use full DB accounting
  • Otherwise need to recognise the present value of any recovery plan in place
  • Resulting impact recognised through profit or loss


what has changed recognising a pension asset
What has changed? – Recognising a pension asset

A surplus can only be recognised through

  • an assumed contribution holiday which is offset against future accrual
  • The value of any agreed refunds

Very restrictive in particular for closed schemes

FRS 17

FRS 102

  • No longer specifies that a refund needs to be agreed
  • Therefore may provide more scope for recognising the surplus
  • Current view is that IFRIC 14 will apply
  • Will require an unconditional right to a refund at some point in the life of the plan
  • BUT, minimum funding requirements would apply
  • Potential for big winners and losers from this change
what has changed disclosure requirements
What has changed? – Disclosure requirements

FRS 17 disclosures requirements already based on ‘old’ IAS 19

FRS 102 does not follow ‘revised’ IAS 19

Much simplified disclosures framework

Very few qualitative disclosures

Plans with more than one employer will have additional disclosure requirements

  • Any agreement or policy for charging costs to each entity needs to be stated
  • How the contributions of each entity are determined needs to be stated
  • Potentially require full defined benefit disclosure
what has changed terminology
What has changed? – Terminology

The terminology of the international standards has been adopted

The balance sheet is now the ‘statement of financial position’

The P&L is the ‘statement of comprehensive income’

The STRGL is now the OCI

Actuarial gains and losses are ‘remeasurements’

Liabilities are the ‘Defined Benefit Obligation’


What standards are clients planning on adopting?

Will they need us to do more than just pensions?

First comparative year starts in a month!

Groups will need to consider how to allow for the changes

Those participating in multi-employer plans need to consider

  • Whether full DB accounting can be used
  • What the impact of recognising the recovery plan might be
  • The impact of any ongoing valuation negotiations on future company balance sheets
contact details
Contact details

Name: Murray Wright

Email: [email protected]

Telephone:+44 (0)131 456 6868

Name: Russell Laver

Email: [email protected]

Telephone:+44 (0)131 203 2857