Some might call the recent ruling on GMP equalisation déjà vu, taking us back to 1990 and the complex discussions on the best way to implement the Barber ruling. For me, it’s more like ‘jamais vu’ – a state that describes an impression that I’m seeing a situation for the first time, despite rationally knowing that I’ve experienced it a thousand times before. The reason I feel like this is because, for me, benefit equalisation is nothing new. Analysing, correcting and implementing equalisation remains a persistent burden for administrators and trustees.
One in three schemes we implement at Trafalgar House have problems with equalisation. And I don’t mean GMP equalisation, I’m talking about Barber equalisation. Nearly 30 years on and the industry is still struggling to equalise benefits. Equalisation issues can lead to members being misquoted benefits and expensive, lengthy rectification programmes, all while the sponsor foots the bill with justifiable cries of “I thought we had dealt with this”.
When you transition pensions administration you leave no stone unturned. Practices regarded as accepted and sacred are now up for grabs. Every decision, factor, methodology and process must be justified and corroborated by documentary evidence. And most commonly, the one area that continues to demonstrate a lack of thorough documentation, process and methodology is equalisation.
The errors of the past, however, act as a salutary lesson for today. By understanding why and how things have gone so badly wrong in implementing Barber, we can put things right in the way we handle GMP equalisation. The most common problems we find with equalisation can act as a checklist for how we should go about implementing GMP equalisation in the best, most sustainable way.
Fewer than one in ten pension schemes have a documented, agreed and universally adhered to methodology for applying equalisation. “But we have an equalisation Deed” I hear you say. Deeds often provide very little guidance in the practical application of rules, especially when it comes to the minutiae of how to actually calculate and apply an equalisation split. A Deed in isolation does not provide a basis, nor does it apply any practical input - this is where one of the biggest gaps in the process exists. When a Deed is provided to an administrator, they will use their best endeavours to interpret and apply those rules to a member’s benefits. This interpretation could differ from that of the actuary, a subsequent administrator or an insurance company. There is no substitute for a documented, universally agreed methodology. And by universally agreed, I mean between all a scheme’s advisers… yes, including the administrator.
The vanity of creativity
A real credit to the pensions industry is our way of finding solutions to complex problems. A real discredit is that we find a thousand different solutions, some more complex than the original issue. Creative, complex minds often deliver creative, complex solutions. Designed to keep liabilities to a minimum, many fixes become so unfathomable they are doomed to fail. From an administrator’s perspective it is always the simplest most pragmatic solutions that stand the test of time and have least propensity to fail. And make no mistake, the cost of messing up equalisation can cost hundreds of thousands to rectify.
Method before data
If you want something to gradually go wrong over a long period of time, with very little idea of how and when errors crept in, then change an outcome by applying formulae. Schemes have generally adopted two approaches to equalising benefits. Apply a formula at the point of quotation or crystallisation. Or, update core data as part of a one-off exercise. History has decisively demonstrated that updating core data is by far the most secure, sustainable and simplest solution. Failure to apply, maintain and manage formulae to cover changes on a transactional basis is the root cause of most administration failures. Adding more formulae, because it’s a cheaper short-term solution, will lead to more complexity and opportunity for error over the long-term. Adopting a solution that allows you to update core data in a single exercise will pay dividends in the long-run. It will be more secure, less reliant on systems and knowledge transfer and all-round easier to report on and manage. Once and done.
As the dust settles on the GMP equalisation ruling, and the wave of advisers pile in to counsel trustees on the lowest cost and quickest implementation method, I implore them to save a thought for us administrators. Don’t be seduced by creative, complex solutions that will invite risk and error over the long-run. Look to the experience of Barber equalisation and the problems we administrators are still working to rectify, caused by over-engineered solutions that only make sense on paper. And remember, at the end of all this, you are going to be the ones picking up the pieces of a confused, complicated and unworkable solution – the exact thing we’re still doing thirty years on from Barber. Whatever GMP equalisation method you adopt, remember these three rules; data is king, simple is sublime, and documentation is divine.
Gillian Hickey, Implementation Project Manager