Natasha Browne looks at why trustees need to treat GMP reconciliation more seriously ahead of HMRC's April 2016 deadline.
- Trustees have until April 2016 to register for HMRC’s Scheme Reconciliation Service
- HMRC will stop replying to scheme queries in October 2018
- HMRC will write to members with contracted-out benefits in December 2018 to inform them of their GMP entitlement
Over the past year, trustees have been wrestling with auto-enrolment (AE), the new pension freedoms, and various consultations including on the tax treatment of retirement income.
As such, it is no wonder the issue of reconciling data on guaranteed minimum pensions (GMPs) with HM Revenue and Customs (HMRC) has gone under the radar. But the time to act is quickly expiring.
Indeed, recent research from Professional Pensions found only one in five schemes had reconciled their data. Just over half with contracted out schemes said they had a plan in place to reconcile, but over a fifth had taken no action at all.
This is alarming given that the deadline for submitting an expression of interest form to HMRC is 5 April 2016. Schemes will not be able to use the tax office's Scheme Reconciliation Service (SRS) after this date.
Add to this the fact that HMRC is adamant it will not respond to queries after October 2018 and the urgency for action is ever more apparent.
Equiniti has calculated there are 17,000 members to reconcile each day between April 2014 and 2018, when contracting out comes to an end. And there are still around 1,000 schemes left to reconcile.
Experts agree that most schemes are beginning to pay more credence to the issue. However, doubts remain over whether or not sufficient action is being taken early enough.
Taylor Wessing senior associate Georgina Wardrop says: "In our experience, most schemes are taking the deadline for GMP reconciliation seriously and understand that urgent action is now needed if they are to ensure that scheme and HMRC data regarding GMPs is reconciled and correct.
"That said, schemes that are not in regular contact with advisers may well still be unaware of the issue, as it has not been given a high profile in the pensions press to date. There may also be an unfortunate natural inclination for some to switch off at the mention of ‘GMPs'."
Equiniti operations director Stewart Winter adds: "It's tough because while the level of engagement is very positive, the action has been somewhat different.
"Trustees now know they have one bite at the cherry and they are making noises in the right way and the schemes that have fully engaged are working through this. But it's those schemes that are still processing what this actually means that are creating a bit of a problem because they're delaying their decisions, and therefore the work that can be done.
"For this to work, we need to get absolutely efficient processes in place for everybody across the line. So for those schemes delaying their decisions, it could have a massive impact. There is so much work in a short amount of time."
In June, the Pensions Administration Standards Association (PASA) announced the members of its GMP working group. The group, which offers support to schemes struggling with the issue, has published a step-by-step guide on why schemes should reconcile their data with HMRC.
One of the key reasons why trustees need to act is to protect their schemes from future claims made by disgruntled members whose GMP benefits were overlooked.
This is especially important because HMRC will write to members with contracted-out benefits to set out their GMP entitlements after December 2018. The tax office will assume its own data is correct, potentially increasing the liabilities on schemes.
Gateley partner Kate Lloyd says: "Trustees may question why they have to go through this process. First, if they don't they may have individuals claiming benefits that they do not think they have a liability for but will not be able to refute this with HMRC.
"They will be stuck with this liability and possibly irate members if they refuse to accept it, which could result in member complaints/reputational issues.
"Trustees have a duty to pay the benefits members are entitled to and to ensure that scheme records are accurate and up to date. GMP reconciliation would invariably have needed to have been undertaken if scheme benefits were bought out - which is the aim of most schemes.
"It would be better to do so when HMRC is available to assist with queries than attempt to do so without the benefit of HMRC and be stuck with liabilities that may not be correctly attributable to the scheme or of a higher amount than the scheme has funded for."
Trustees will then need to set a tolerance threshold on the level of discrepancy they accept between their own data and HMRC's. According to Lloyd, most trustees are using a £2 per week tolerance as laid out by The Pensions Regulator's (TPR) guidance on winding-up.
Sackers partner Fuat Sami adds: "Having set the tolerance threshold you have to go through deciding how many members there are where there is a discrepancy which goes beyond the tolerance threshold.
"Then you have to take steps to investigate why the discrepancy has arisen - to see whether the scheme record is correct or whether HMRC's record is correct."
Sometimes the discrepancy is easily explained. It could be because HMRC has not updated its records where there has been a bulk transfer out of the scheme, Sami explains.
He adds: "But there will be other cases where it's a lot more difficult to work out exactly why there is a discrepancy. That whole investigative process plus the time it takes for HMRC to respond, and the time it takes for administrators to work out an appropriate resolution, can take anything up to two years.
"It's quite drawn out and painful. Up to now it's been quite a low priority process. Schemes have much bigger things to deal with and this is essentially the sort of thing that people can't get particularly excited about and always gets added to the end of the list. That's another reason why it can be more drawn out."
Once schemes have registered with HMRC, they need to start thinking about their in-house resources and whether or not they are sufficiently equipped to cope with the weight of the exercise.
If they need additional support, they must decide whether this will be paid for through the scheme assets or straight from the sponsor's pocket.
As such, the trustees will have to gear up for a conversation with their sponsor. And the same is true if it turns out their liabilities have increased as result of the reconciliation.
Sami says: "If benefits have been understated there may be additional benefits which need to be paid and that can have a knock on effect on the funding level of the scheme, which again has a bearing on the cost to the employer. So there are a couple of different dimensions across the angle."
But Winter adds: "Potentially, doing a GMP reconciliation can save the pensions bottom line because the liabilities on the scheme could be less. And therefore there is no hand in the pocket from the employer to pick up the tab because it's already covered.
"On the other hand, the employer could be asked to pick up the tab and this is the trouble the trustees have. If they can see a direct saving, it's an easy decision. If they have to put their hand in their pocket, it's a harder decision. But it's not one that should get in the way of a decision - you would have to put your hand in your pocket anyway.
"It's that whole risk of whether you want to put off something today that you have to sort out later, which maybe more of a problem a) because a member has come forward and is asking for more money and compensation and b) it's harder to get the true numbers because HMRC won't be around to help any more."
Veratta chief operating officer Monica Cope highlights why the GMP amount for any particular individual is so important.
It can impact on their scheme entitlement in many ways including the pension increases a scheme will pay; the spouse's entitlement payable from the scheme; and the amount of tax free cash that can be paid
She adds: "Reconciliation should include all contracted-out liabilities (including post 97 service), not just GMPs.
"Many organisations are coping with other administrative pressures and have limited resources available to complete the exercise, with many putting the task on the back burner to date. Also, as contracted-out reconciliation is a bulk project rather than an everyday task, there may be shortcomings in technical expertise, processes or technology.
"Trustees are advised to ‘shop around' to ensure they are paying a fair price for their contracted-out reconciliation project, and the budget should be closely monitored throughout."
- Scheme liabilities could be different to those expected
- Scheme funding could be being paid on an incorrect level
- Members' benefits could be routinely over or under quoted and paid
- Benefits could be paid to individuals who are not scheme members and not paid to scheme members
- TPR's record-keeping targets may not be met
- GMP equalisation could be delayed or carried out on an incorrect basis
- Less advantageous buy-out terms may be available
Defined benefit (DB) schemes that provide GMPs must revisit and, where necessary, top-up historic cash equivalent transfer values (CETVs) that have been calculated on an unequal basis, a landmark court judgment said last week.
The Pensions Regulator (TPR) has substantially increased the usage of its powers against trustees – posting a sharp rise in the use of formal information gathering powers and High Court production orders during the three months to the end of September....
The Pension Schemes Bill has completed its third reading, crossing its latest hurdle in the House of Commons.
An amendment to the Pensions Schemes Bill which would have seen people given a pre-booked Pension Wise appointment ahead of accessing their retirement savings has been defeated.
Technology platform PensionSync has partnered with quantum employment pioneer My Digital to help contractors and employers manage pensions as more workers do temporary work for multiple firms.