Frankly, it’s not that hard – a quick(ish) guide to anti-franking

A long time ago, in an office far, far away, when I was a young pensions lawyer, people used to refer to anti-franking in hushed and reverential tones.  It was, with some justification, seen as the most complicated piece of pensions law (ever).  Of course, this was 30 years ago when, unlike now, there wasn’t actually all that much pensions law.  However, despite the myriad pieces of legislation we now have, and although the employer debt provisions could give anti-franking a run for its money any day, it remains something that even the most experienced lawyer approaches with trepidation.   

Until recently, anti-franking was (thankfully) not something that got the dust brushed off it too often – except maybe by scheme administrators.  However, GMP equalisation has changed that. Suddenly, the need to apply the anti-franking test in a way that achieves equality is something that needs to be thought about and understood, and is also something that can generate some surprisingly large numbers. 

So, I thought I would attempt a brief explanation of how it all works, what it’s for and why it can cause an equalisation headache. 

How it all works

The anti-franking legislation is in sections 87 to 92 of the Pension Schemes Act 1993, and despite the ridiculous complexity of some of the drafting (later earnings addition, I’m looking at you) is conceptually simple.   It was designed to ensure that if a member ceased to be in contracted-out employment before their GMP came into payment, any subsequent increases to the value of the GMP could not be offset or “franked” against other benefits. 

Things were tweaked a bit when contracting-out ceased in April 2016 and everyone ceased to be in contracted-out employment.  The anti-franking test was changed to apply from the earlier of the member leaving pensionable service or reaching their GMP age (65 for men and 60 for women).

Anti-franking provides that where there is a gap between leaving service or GMP age (referred to as the “cessation date”) and the member taking their GMP, the pension that the member eventually receives has to be at least: 

• their entitlement at the cessation date; plus
• any later increases to the GMP (including GMP revaluation and postponement factors if it is paid after GMP age); plus
• any additional benefits accrued in the scheme since the cessation date; plus
• any late retirement factors on the excess; plus
• where there is continuing accrual, any increases to the excess at the cessation date as a result of salary linkage (the “later earnings addition”). 

The total of these amounts is referred to as “the relevant aggregate”. 

There are a few other points to note when thinking about anti-franking: 

• It does not apply where a member takes an early or late retirement pension.  However, it cannot be completely ignored, as the Preservation Regulations provide that any such pension must be “equal to the value” of the benefit the member has accrued, and this should include consideration of the value of any anti-franking.
• Although it is tempting to view anti-franking as a one-off test that applies when the benefit comes into payment, it must be met for the whole period that a pension is in payment.
• It does not apply where an individual left service before1985.  In addition, where they left before 21 July 1989, the later earnings addition does not apply.
• Revaluation on the excess over GMP does not form part of the anti-franking test but is protected under separate legislation and therefore forms an additional part of the minimum benefit a member must receive. 

And that’s it for the basic principles.  There are, of course, lots of anti-franking complexities, including whether you can frank against pension increases (there is no specific protection for them), but they’re a topic for another day. 

A few words about equalisation

Hopefully, I haven’t lost you yet.  I said I would briefly explain why anti-franking causes issues in relation to GMP equalisation.  The easiest way for me to do this is by an example - with apologies to any actuaries reading this, as I know my maths is over-simplistic. 

Example: 

Frank and Betty are exactly the same age, started service on the same date, earn the same amount and are lucky enough to have DB benefits in the 70s Sitcom Pension Scheme which has an accrual rate of 1/60^ths and a normal retirement age of 65. 

They reached age 60 on 6 April 2010 when they both had 20 years’ service and were earning £72,000pa. 

At age 60, Frank and Betty both had accrued benefits of £24,000 (20/60 x £72,000). In Betty’s case, 5% (£1,200) of this was GMP. 

In 2015, when they reached age 65 their salary had gone up 10% so they were earning £79,200 and had 25 years of accrual.  This meant that their pension entitlement was £33,000 (25/60 x £79,2000). 

However, an anti-franking check had to be done for Betty, as her cessation date was her GMP age of 60.  The table below sets out what this might have looked like. 

As Betty’s accrued pension from the scheme at 65 was £33,000, anti-franking required her pension to be increased by £380.  If the GMP had been a larger proportion of Betty’s pension, this number could have been much higher. 

Fast forward to 2025 and the scheme’s GMP equalisation exercise now requires Frank’s pension to be the same as Betty’s.  This means that Frank should have received an uplift too and therefore Frank will be entitled to a back-payment. 

I have no idea whether these numbers are realistic, but I do know that the application of anti-franking can make a significant impact to the cost of equalisation and hopefully this explains why. 

It is also worth noting that historically, Betty is fairly likely to have retired at age 60 and so no anti-franking uplift would have been due.  However, as Frank would historically have worked to age 65, equalisation will entitle him to the uplift Betty would have received if she had stayed to the same age.  This means that for many schemes, equalisation has made anti-franking far more relevant than it was in the past. 

PASA has produced guidance on this which is worth looking at if you want more detail.

As GMPs ceased accruing almost 30 years ago, over the next decade or so, we should gradually see less and less of anti-franking as all the members who have a GMP entitlement retire, so enjoy it while you can! 

The drafting of parts of the legislation is unfortunate (to say the least), and it does not always mesh well with the complexities of modern DB benefits, but if you remember what it’s trying to achieve, it’s really not that bad.  Honest.