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The end is nigh

Thu 07 Aug 2014

The demise of contracting out is sooner than we think...

The demise of contracting-out will be with us sooner than anticipated. The DWP’s white paper single tier pension – a simple foundation for saving – suggested that abolition could be with us as early as April 2016. The Pensions Act 2014 received Royal Assent on 14 May 2014 and this is now law. The contracting-out status will cease for defined benefit (DB) schemes a full 12 months earlier than was previously scheduled.

Although you may welcome the end of contracting-out, trustees will have a great deal of work to do in advance of this, as they will be expected to ensure the guaranteed minimum pension (GMP) data they hold is accurate before contracting-out ends. This is no mean feat and considering the goal posts have been moved in regards to timescales, time is not on the side of trustees of contracted-out DB schemes.

This is important for a very straightforward reason. When a scheme is contracted-out of the second part of the State Earnings Related Pension Scheme (SERPS) it has to provide a certain minimum level of pension benefits, known as the GMP.

GMP reconciliation is the process used to ensure the scheme records agree with those of the National Insurance Contributions Office (NICO, which is part of HMRC). This enables a scheme to consider its data as clean and entirely reliable. 

GMPs are typically reconciled on an individual basis at crystallisation events. These include GMP retirement age, death, transfer-out or on a bulk basis, which is when schemes go to buy-out. 

In the near future, NICO will offer a scheme reconciliation service. This will assist trustees in reconciling their records for all non-active members. However, this will create a bottleneck, as all contracted-out DB schemes must do this.

If your company has been subject to a number of mergers and acquisitions, this could create quite a complicated picture of your organisation

The GMP reconciliation process is very complex, and as a result, it can typically take up to two years or more to complete. It is therefore advisable for schemes to verify their GMPs at the earliest opportunity.

Although consultation around how schemes should deal with GMPs is ongoing, now is the time to talk to your administrator and discuss how they could support you throughout this process.

We recommend clients begin the project as soon as possible, so as to take advantage of the NICO reconciliation service. You should also be sure to check that your preferred supplier has relevant experience in GMPs.

You should establish costs for each distinct phase of the project and keep a close eye on it. Work in partnership with your supplier on this and as a first step, ask for their thoughts on the project risks.

Time must be invested to ensure that you have documented the contracted-out history of your scheme. It is worth bearing in mind that if your company has been subject to a number of mergers and acquisitions, this could create quite a complicated picture of your organisation.

The amount of work involved will depend on the quality of past record-keeping. A good investment of time would be to determine the best reconciliation strategy to adopt – which should include the tolerances that might be used – if or when your data differs from the NICO’s. This could potentially reduce the level of work and have a huge impact on the overall cost of the project.

For more information contact our GMP experts on: 01189 513815 or email stewart.winter@equiniti.com

The pros of GMP reconciliation

Carrying out the GMP reconciliation process is advantageous as it enables a scheme to:

• comply with the regulator’s data quality checking requirements
• ensure members’ benefits are accurate
• provide far more accurate actuarial valuations
• access more favourable buy-out terms
• accurately record the scheme’s liabilities
• increase administration efficiencies
• ensure payment or recovery of missed or overpaid State Scheme Premiums (SSPs)
• avoid incorrect benefits being paid out from the scheme
• conduct any future GMP equalisation exercises from accurate records.