At their heart, the responsibilities of trustees and pension administrators can be distilled into one simple golden rule: “Pay the right benefits, to the right people, at the right time”. However historically for contracted out occupational pension schemes, important tranches of those benefits have been calculated using methods, earnings and revaluation requirements beyond their control. So, whilst the rule may still be golden, it has been far from simple. We are, of course, talking about Guaranteed Minimum Pensions (GMPs).
GMPs
GMPs accrued for service between 1978-1997 and were designed to provide an equivalent benefit to the earnings-related tier of the State Pension that the member would otherwise have earned had they not been a member of their employer’s pension scheme. In 1997 they were replaced by Protected Rights, but accrued GMP rights endured, often as a time consuming administrative headache.
With the advent of a single tier State Pension, contracting out on a defined benefit basis ceased with effect from 5 April 2016 (having already ceased for defined contribution schemes in 2012). HMRC has engaged with schemes to encourage them to validate and reconcile their remaining records before they withdraw their support on the issue at the close of 2018.
What’s new?
This confers a responsibility on trustees to ensure their records correctly reflect the changing complexities of the last 38 years. However, it also represents a great opportunity, with HMRC giving unprecedented access to their records through both the Scheme Reconciliation Service (SRS) and the excellent online GMP checker. This allows administrators to interrogate the HMRC database for individuals or groups of members producing earnings information and GMP calculations for a variety of dates and scenarios. It seems that HMRC are seeking a genuinely collaborative exchange to ensure the correct information is held.
It is important for trustees to engage with the opportunity to both ensure that their records correctly reflect the liabilities they hold and that they are not being held responsible for benefits that have rightly been discharged, through historic refunds, transfers and trivial commutation exercises etc. Schemes with deferred and pensioner members should already be some way down the road of confirming with HMRC the liabilities they hold and perhaps more importantly declaring those which they believe they do not!
What’s next?
HMRC is next turning its attention to active members (i.e. those who were still contributing members of schemes at the point contracting out ceased in April 2016). Like the recent exercise for deferred and pensioner members, schemes who wish to gain access to HMRC’s records to compare them with their own need to register to acquire the relevant data. HMRC launched this process on 6 December 2016 with a view to collating their data in respect of these members over the Christmas period. The results are expected to be available between January and March of 2017.
What now?
This is far from the end, however and may only clear the path for the next development, that of Equalisation. Equalisation of benefits between men and women has been a thorny issue in pension administration circles since the Barber judgement of 1990. Draft regulations and guidance were first issued in respect of its effect on GMPs in 2012 only to be quickly abandoned due to complexities and industry concerns as to the burdens it would place on scheme administration.
Given Britain’s decision in June 2016 to leave the EU, it was wondered whether, as an EU directive, the whole thing may be quietly dropped, but the DWP launched a consultation running to 15 January 2017 discussing ways that the issue may be handled. Any decisions of methodology will not be compulsory nor binding but perhaps they are hoping that a workable and equitable solution to the issue may remove one of the barriers to the obvious final chapter of the GMP story; conversion.
GMP conversion has been available since 2009 and allows trustees, subject to certain conditions (including equalisation), to convert GMPs and the ongoing administrative complexities they involve for benefits of actuarial equivalent value. Tellingly the requirement for equivalence applies only at the date of conversion and is not ongoing.
Conclusion
In attempting to finally end its involvement with GMPs, HMRC has expended more effort and become more helpfully engaged in the issue than at any time since 1997. This has in turn brought a sharper focus from trustees and administrators on to the subject and with the work already ongoing and the potential developments outlined above maybe still to come, it seems that reports of GMPs’ imminent demise may be greatly exaggerated.
As ever, we will keep you posted of any progress made on the subject as and when it becomes available.
Matthew Elguezabal