To add some complexity to the already challenging GMPE, there is also the anti-franking test to consider.
What is anti-franking?
The purpose of anti-franking is to ensure that, except in limited circumstances, the revaluation applied to GMPs in deferment cannot be offset against a member’s other benefits.
Anti-franking applies directly to members who leave before normal pension age and then retire at normal pension age, and to members who leave active service at or over normal pension age (subject to certain additional conditions set out in the Pension Schemes Act 1993). However, the preservation requirements for members taking early or late retirement to receive benefits at least equal in value to those they would have received had they retired at normal pension age means it may have an indirect effect on other members as well.
Where anti-franking applies, an “anti-franking minimum pension” underpins the member’s scheme pension and this can result in pensions in payment being “stepped up” when a member reaches their GMP age (60 for women; 65 for men), or at retirement when a member remains in active pensionable service after their GMP age.
It is unusual for scheme rules to prescribe how anti-franking tests should be applied and this has resulted in different techniques being used. A scheme’s past practice will usually dictate how anti-franking will be approached for the purposes of equalisation.
PASA’s approach
In September this year, PASA published their Anti-franking Guidance which aims to help trustees to understand how anti-franking should be applied for equalisation purposes.
The Guidance describes three potential techniques for applying anti-franking in the GMPE project:
1- Ring-fence (90-97) Technique
This technique was already set up in September 2021 by the PASA Methodology Guidance and, as its name suggests, it “ring-fences” 90-97 benefits.
In summary, this technique (i) complies with legislation and applies the anti-franking test to the member's whole (unequalised) benefit at the member's GMP Age or later date of retirement and (ii) compares member’s benefits which would have been payable for service in the period between 1990 and 1997 to the comparator in respect of the same period. If the comparison shows that the comparator would have had a higher benefit, then the member would be entitled to receive the uplift.
This technique requires schemes to hold three different pension streams (whole pension for true sex, true 90-97 and comparator 90-97).
2- DWP 2012 (Whole of Service Mixed Sex) Technique
In summary, this technique (i) complies with legislation and applies the anti-franking test to the member's whole (unequalised) benefit at the member's GMP Age or later date of retirement and (ii) compares this total pension to a pension calculated as follows:
- The Pre90 element consists of the member's pension
- The Post90 element consists of the opposite sex's pension
- The anti-franking minimum at each age consists of the sum of the following components:
▪ The Pre90 minimum for the true sex. This will always include the member’s Pre90 pension at cessation date, and any applicable increase in Pre90 excess pension, but will only include increases on Pre90 GMP if the true sex has reached GMP age
▪ The Post90 minimum for the opposite sex. This will always include the comparator’s Post90 pension at cessation date, and any applicable increase in Post90 excess pension, but will only include increases on Post90 GMP if the comparator has reached GMP age.
3- Apportionment (Whole of Service Pure Sex) Technique
As explained in the Guidance, this technique:
complies with legislation and applies the anti-franking test to the member's whole (unequalised) benefit at the member's GMP Age or later date of retirement;
applies the anti-franking test to the opposite comparator's whole benefit (including Pre90 pension) at the comparator's GMP age or later date of retirement;
pro-rates the anti-franking step-ups in an appropriate manner for the 90-97 period only; and
compares the benefit for a member relating to 90-97 service only, with the member's step-up calculated in the previous step, with that for the equivalent pension for the comparator and, if the comparator would have a higher benefit, then an uplift will need to be provided to the member.
This method requires four streams (whole pension for true sex, true 90-97, whole pension for comparator sex and comparator 90-97).
Clearly, whatever technique will be used there will be an amount of data to collect and some calculations to perform and therefore it is recommended for all schemes to liaise with their pension administrator to discuss different options and outcomes.