The cross-industry GMP Equalisation Working Group (GMPEWG) has issued further 'good practice' guidance for UK pension schemes, highlighting potential tax issues that may arise around GMP equalisation.

The guidance identifies the tax issues which schemes may encounter when adjusting benefits to correct for the inequalities of GMPs, in an effort to support schemes in making informed decisions, as well as identifying possible approaches for dealing with these issues.

The group, which is chaired by the Pension Administration Standards Association (Pasa), based the guidance on HMRC's previous GMP equalisation newsletters, which provided guidance on the tax issues relating to equalisation.

Commenting on the guidance, tax sub-group chair, Daniel Gerring, stated: “Tax considerations are crucial for GMP equalisation exercises. Since the first judgment in the Lloyds Bank case established once and for all the need to equalise there has been a natural desire to get on with it.

“But schemes continue to be faced with difficult unresolved issues – tax often being one of the knottiest.

“The newsletters published by HMRC provided an important starting point and we hope this guidance will provide a further layer of support in getting things moving. This guidance combines commentary and analysis with good practice guidance, to help enable schemes to make informed decisions."

He continued: “Many schemes want to implement GMP equalisation projects as soon as they reasonably can, and we hope this guidance will help the industry address tax issues in a pragmatic and proportionate way."

LCP senior consultant and co-author of the guidance, Shayala McRae, added: “This guidance will be really helpful for those paying equalisation uplifts to members.

"We have sought to show how tax needn’t be taxing for most members, setting out practical approaches for scheme administrators to do what is needed without causing members unnecessary concern or hassle.

"There will be a few cases where tax bills of tens of thousands of pounds could result from equalisation.

"We have set out what the issues are to help identify these rare cases and how the tax could potentially be paid from the additional benefits, so members don’t face nasty surprises later on.”

Sackers partner and head of knowhow, Claire Carey, has also welcomed the "very comprehensive" guidance, stating that it will offer practical approaches for addressing the groundwork already laid, in turn enabling schemes to move forward "on a more informed basis".

However, she stressed that the guidance has "crucially" stopped short of providing a "much-needed" steer on the tax implications of GMP conversion, as did the HMRC guidance before it.

Indeed, Carey cited research from Sackers, which found that just under 60 per cent of schemes are still in the starting blocks on their GMP equalisation journey, emphasising that lack of clear tax guidance on conversion was a common reasoning for this, alongside issues around data, complexity, and ongoing reconciliation.

The latest guidance from GMPEWG also acknowledged that there was "ongoing uncertainty" around the tax implications for conversion, stating however, that no further guidance on GMP conversion is expected from HMRC at this time.

Despite this, Pasa has confirmed that the working group is preparing further guidance on GMP conversion, which is expected to be published at the end of April 2021.

Carey highlighted this proposed conversion guidance as a "hope on the horizon", emphasising that whilst today's guidance will help some schemes, a key piece of the puzzle is still missing for others.

She stated: “GMP conversion, which was the subject of a 2016 consultation and guidance in April 2019 in response to the Lloyds No.1 case, has long been on the Department for Work and Pension's radar as a possible option for helping to crack the GMP equalisation conundrum.

"Provided specific procedural steps are taken and certain conditions met, this legislative facility enables GMPs to be converted into ordinary defined benefit (DB) benefits.

“I do not underestimate the challenges that lie ahead for those undertaking GMP equalisation projects and this new Pasa guidance will undoubtedly help some schemes press ahead. But, for others, an essential ingredient is still missing.”

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