What is changing?
The introduction of the single-tier state pension from April this year means the end of schemes being able to "contract-out" of the additional state pension. Contracting-out meant that schemes paid part of the state pension to a member and in return the employer and the scheme member paid lower National Insurance (NI) contributions. That NI reduction will cease from 6 April 2016, leading to an immediate increase in NI contributions for employers and employees.
In 2019 HMRC plans to notify many, if not all, pension scheme members of the benefits they have earned in contracted-out occupational pension schemes. HMRC are believed to hold records implying a 30% greater pension liability than that held by the schemes themselves. Whilst reconciliation is a voluntary exercise, it is essential that schemes take the opportunity to reconcile their contracted-out records with those held by HMRC if they wish to ensure that they only pay pension benefits to those who are entitled to them. Failing to reconcile could lead to the scheme being asked to pay pension benefits to people who have transferred-out, received a refund or who were never in the scheme in the first place.
What do schemes need to do?
Schemes must register to receive a copy of the records held by HMRC by 5 April 2016. If they don’t they may well have to accept the records held by HMRC. Schemes might on average expect only around 50% of records held by them and HMRC to match so simply accepting the HMRC records could lead to a significant increase in scheme liabilities and thus deficits. It could also lead to members being short changed on their state pension.
What is involved?
A reconciliation of this nature can often take over five years, but schemes only have until December 2018 to complete the exercise.
The scale of the project should not be underestimated. Once schemes have carried out an initial matching exercise, they must find out why some records do not match. Whilst a number of the discrepancies can be fixed in bulk, the majority will have to be dealt with individually and this takes time and expertise. Pension administration teams could see their workload increase by around 50% in the run up to December 2018 and some may lack the necessary expertise to carry out the work.
If you would like to discuss your scheme and see if we can be of any help please contact Virginia Burke on 07436 270137 or email firstname.lastname@example.org. You can find out more about contracting-out reconciliation here.