Aon Corporation : DWP proposal on GMP equalisation could cost £5 billion more than is needed

LONDON, 24 January 2012 - Aon Hewitt, the global human resource consulting and outsourcing business of Aon Corporation (NYSE:AON), has today voiced its concerns about the plans to have pension schemes equalise their benefits to take into account the effect of Guaranteed Minimum Pensions (GMPs) earned between 1990 and 1997.

Paul McGlone, principal & actuary at Aon Hewitt, said:

"This issue has been around for over 20 years, and for good reasons.  First, it has not been clear whether the difference arising from GMPs needed to be dealt with in isolation, given that it arises as a direct result of differences in state benefits.  Second, there has never been any consensus on how to achieve equalisation.  Finally, the impact of equalisation is likely to be very modest in individual terms.

"Despite this, we now have a consultation which describes a way to equalise schemes to allow for GMPs.  Unfortunately, the proposal - which is likely to become the default since it will be seen to be endorsed by the Department for Work and Pensions (DWP) - is both unhelpful and excessively expensive:
• Unhelpful - because it has not been tested, so it does not provide any safe haven for schemes adopting this approach.  Many in the industry have been calling for a test case to confirm once and for all what needs to be done.
• Expensive - because Aon Hewitt estimates it would cost roughly £10 billion in increased benefits alone (ie before the additional legal, actuarial and administration fees incurred), whereas a different approach could cost just £5 billion."

Top 10 difficulties with GMP equalisation

Aon Hewitt has listed the top 10 practical difficulties with equalising to allow for GMPs.

1. Government direction: As a move, it is completely disconnected from the Minister's aim to re-invigorate pensions.  If members and sponsors see that changes can be made retrospectively, 20 years after the event, what confidence can they have going forward?
2. Dealing with 20-year old issue: Many of the people who were or are affected by this have already died, retired, transferred out, divorced or been bought out with insurers.  For schemes, as a minimum that means going back for many years, and in some cases tracking down members with whom they have lost contact many years ago.
3. Unknown GMPs: Many schemes do not know the GMPs they have, because it takes the National Insurance Contributions Office (NICO) a long time to confirm them.  Before schemes can equalise benefits they need accurate records.
4. Trustee dilemma: Equalising in a "simple" way (such as the consultation proposes) gives excessive benefits, while doing it properly will cost more in advice.  Trustees face a dilemma whether to pay advisers or overpay members.
5. Increased fees: Regardless of the exact method, adviser fees will increase - actuarial (to calculate the numbers), legal (to amend the deeds), administration (to run it) and trustees (to discuss it), at a time when many schemes are trying to reduce fees.
6. Increased benefits: Total estimated cost of increasing the benefits alone is around
£6 billion, at a time when schemes already have huge deficits.  This is unwelcome news.
7. Not actually equal: The changes do not actually equalise benefits, as members still get unequal benefits from the state, as the state pays part of the increases on
8. Communication: Members will have no clue about what is happening and will just see this as another "scandal".  Getting engagement from them will be difficult, and once they are engaged they may be disappointed at the minimal impact it has on them.
9. Tax treatment: It is not clear how any increase in benefits will be treated for tax purposes.
10. Lack of clarity: Even with the DWP consultation, there is no certainty that the method will not be challenged, so we should expect more test cases and more clarification later - this could run for years to come.

Paul McGlone continued:

"It is not at all clear whether the legal case for GMP equalisation has been accepted.  But assuming it has, there are a number of potentially simpler ways in which this issue could be dealt with.

"Aon Hewitt believes that a one-off test which focuses on overall value rather than pension paid each year (which would need to be monitored for many decades) would be both simpler and cheaper.  Precedents exist already in legislation, such as section 67 of the Pensions Act, to adjust benefits based on overall value and a value-based test could resolve this issue once and for all, enabling employers to focus on more pressing pension issues such as auto-enrolment and dealing with the ongoing financial crisis."

Media Contact: 

Colin Mayes                                      Quintin Keanie 
 Aon Hewitt                                        Capital MSL
 01372 733689                                 020 7255 5154
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Notes to Editors
About Aon Hewitt
Aon Hewitt is the global leader in human resource consulting and outsourcing solutions.  The company partners with organisations to solve their most complex benefits, talent and related financial challenges, and improve business performance.  Aon Hewitt designs, implements, communicates and administers a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies.  With more than 29,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees.  For more information on Aon Hewitt, please visit .

About Aon
Aon Corporation (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 61,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit to learn about Aon's global partnership and shirt sponsorship with Manchester United.