GMP Reconciliation - why all the fuss?

There are many articles in the pensions press at the moment looking at GMP reconciliation and the impending deadline for registering with HMRC on 5th April 2016 - including mine in Engaged Investor magazine!

This is an important matter if your scheme has ever contracted out of the State Earnings Related Pension Scheme (SERPS) or the State Second Pensions (S2P) on a defined benefit basis. Trustees should seek confirmation from their administrator that the reconciliation of the GMPs has been completed, or that the scheme is registered with HMRC for their reconciliation service.

Let me explain why this is important.

When SERPS was introduced with effect from April 1978, employers were able to contract out of this part of the State pension scheme, receiving a discount on National Insurance contributions in return for promising to provide a pension that would be at least as good as that which the member would have received had they accrued an entitlement under SERPS for that period of employement - the Guaranteed Minimum Pension or 'GMP'.

This part of a members' pension can be particularly valuable since it has to be preserved on a very generous basis if the member leaves the scheme, or when the scheme stopped contracting out due to scheme design change or wind up. The preservation method was established at a time when inflation and interest rates were significantly higher than they are now, and started out as high as 8.5% per annum - compare that to current savings rates! The revaluation rate gradually reduced, but even members leaving the scheme after April 2012 must have their GMP entitlement revalued at 4.75% pa. Making sure that your scheme is only liable for benefits that members are entitled to is, therefore, very important.

While a scheme is ongoing it is common for each member's GMP entitlement to be reconciled with HMRC at retirement age. This means that most schemes won't have done a complete member GMP reconciliation unless they are doing a full buy-in or buy-out, as part of a risk-reduction exercise or wind up.

The reconcilation process is important because HMRC may have incomplete or inaccurate records, which could lead to their expectation about the GMP entitlement being different from the scheme's. This can come about due to transcription errors in the pre-digital recording process, or the failure to note the transfer of GMP liabilities to a new arrangement on a transfer. This divergence can be picked up in the reconciliation process and rectified, as long as the scheme can provide sufficient evidence to HMRC.

The current interest in this matter is due to HMRC's decision to close the door to future reconciliations. This means that schemes won't be able to challenge HMRC's claim as to how much GMP the scheme must provide. If they say that a member's contracting out record shows that you are liable for a given period and for a given amount, you will not be able to challenge it, even though your records show that he or she took a full transfer to another scheme.

If this worries you - and it should - make sure that your administrator has either completed the GMP reconciliation or has signed up for the process. If they haven't then they have until 5th April 2016 to register for the service.

Having wound up literally hundreds of schemes where GMP reconciliation has been an issue, Able Governance is well placed to provide assistance to your pension scheme, be it on a consultation basis, training for your trustee board, or as independent trustee.