FAS advice on tranching pension benefits questioned

Gillian Macdonald

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FAS has recently released an announcement and supporting information in relation to the calculation of tranched benefits when providing member data to FAS for payment of compensation.

FAS noticed a trend within the data already provided by administrators suggesting that equalisation for some members has not been taken into account or calculated correctly. Commendably FAS has taken immediate steps to inform administrators and trustees and begun to rectify the problem.

As someone who is heavily involved in the laborious task of preparing scheme data for transfer to FAS and being directly involved in such calculations I took a great interest in the guidance being offered.

We understood that FAS compensation was to be 90% of a member’s scheme entitlement however this appears not to be the case and raises the matter of men losing out on part of their scheme entitlement. FAS has stated in recent guidance that:

“(Additionally,) the NPA for GMP tranches should always be the member’s state pension age (i.e. 65 for men, 60 for women). Also, you must ensure that non-GMP tranches which exist solely within the Barber Window (for example, benefit type 9 on the S1) reflect the NPA that is relevant for Barber Window service. “

If the normal retirement age for a scheme has been equalised, when we are calculating a member’s benefits, what we currently tranche is ‘Pre Barber Window’, ‘Barber Window’ and ‘Post Barber Window’ with each part having its own relevant Normal Retirement Age (NRA) and a unique entitlement from the scheme. What FAS are asking administrators to provide is data which has had the Guaranteed Minimum Pension (GMP) removed and consequently only applying the relevant late retirement factors for equalisation to the excess benefits (and not the full scheme entitlement). The revalued GMP will be added back to the uplifted excess at 65. Surely, with the GMP serving as an underpin to scheme benefits this cannot be correct?

Although the GMP is paid at age 60 for females and 65 for males, the whole section of the tranche should be paid at 90% of the scheme entitlement. Using the calculation of an early retirement as an example, you could use the GMP to calculate the pension, however it isn’t actually GMP until the applicable GMP age is reached (therefore it is treated just like the rest of the benefit). Undoubtedly this approach fits the needs of FAS as they are supposed to pay 90% of the member’s scheme entitlement.

This not only concerns me from a calculation stand point and neither is it the first time I have raised a question to FAS on matters of technical clarity. Having experienced first hand the dissection of data, the calculations involved and the sheer size of the data set to be managed, (and this is only one scheme) it makes me wonder how the 903 (figure at Oct 09) other schemes who reportedly qualify for FAS transition are going to be handled.

Never forget – when FAS talk about ‘state pension age’ they actually mean GMP Age! The state pension age will increase to age 65 for all by 2020, however, with the GMP age remaining static at 60 for females and 65 for males.

FAS has advised us that this approach is the way they will require the data until GMP equalisation has been agreed in the next couple of months. So yet another new S1 form and more time spent on supplying data!

Confused – you will be… Now, where’s that calculator?