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GMPs: To reconcile or not to reconcile, that is the question!

GMPs: To reconcile or not to reconcile, that is the question!

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As schemes start to equalise their Guaranteed Minimum Pensions (“GMPs”), there may be some thought as to whether the GMPs currently held on member records are definitely the right starting point for the project.

Reconciliation through to Equalisation

The process of GMP reconciliation should have started before 6 April 2016 for many schemes.  This was the date at which HMRC stopped tracing GMP movements, and when the responsibility for tracking these benefits moved to individual schemes.  There was a two-year window, between 2016 and 2018, for schemes to agree or query membership data with HMRC.

Many schemes started with a member-level reconciliation stage – did the membership numbers match up with the HMRC records? – do all the liabilities held genuinely belong to the scheme?  The process of reconciling contracted out member data was the next stage in the process, and many schemes adopted tolerance levels to limit the investigative or corrective work – in other words, minor differences were accepted as a pragmatic approach.

Roll forward a few years to GMP equalisation, and the ghost of reconciliation can be seen as coming back to haunt us.  Perhaps reconciliation was ‘completed,’ but the rectification of the members’ benefits was not fully implemented.  Perhaps the decisions that were made then would not be made now, so schemes are rethinking their approach.

A dilemma

The question facing many schemes now is “to reconcile or not to reconcile?” as part of the current GMP project work.  Is it nobler to accept any previous reconciliation work and start equalisation based on those conclusions?  Or is it time to take arms against the uncertainty around those older projects and end any doubt about our starting point for equalising this final part of members’ benefits?

A key question around reconciliation is whether to accept scheme data or that held by HMRC – noting that the latter may not be correct and that, since December 2018, it has not been possible to change records held by HMRC.  It is, however, not an easy question to answer.  It is often recommended that sampling should be undertaken to identify how significant the data discrepancies are, and that a differentiated approach between member categories could be taken.

So, what are the risks of not having undertaken a full reconciliation?  Six things to think about are:

  1. Trustees have a duty to pay the right benefits to the right members at the right time. This is a big one!  GMPs can impact the shape of the overall pension for a member, with revised GMPs becoming payable at different times and/or at different rates compared to non-GMP benefits.  Over time this may lead to a total benefit that is too high or too low.
  2. The Pensions Regulator requires trustees to keep good records. They may also investigate if it is felt the trustees are at risk of not meeting their legal obligations, so there should be a good audit trail justifying any approach taken.  In addition, the trustees are data controllers under data protection legislation and so have additional responsibilities.
  3. The impact on scheme funding if benefits are incorrect. This could go either way, and it may not be possible to assess this prior to doing some reconciliation of benefits.
  4. The views of the insurance market. Managing risk in schemes by approaching the insurance market for exercises such as a buy-in or buy-out is increasingly common and premiums may be higher for those schemes where a clear reconciliation process is not evident.  It may also impact on any insurance sought to cover for any potential future claims.
  5. The impact on State Pension for members.  This is a difficult risk to gauge, but HMRC’s records do have an impact on the State Pension because there is a deduction made for any period(s) of contracted out service.  So, if scheme records do not match HMRC, members could win or lose across scheme and State benefits.  This may be hard for members to identify but it is a consideration for trustees nonetheless.
  6. The impact on GMP equalisation. It stands to reason that when equalising GMP benefits the trustees should have confidence about the GMPs that they are starting from.  Otherwise, there is a risk that members will not have their benefits equalised correctly and recalculations are required at a later stage.

How will this all play out in practice?

It is important to state that there is no single path to reconciliation.  The trustees and their advisers should aim to be comfortable that the scheme records reflect the benefits due to members while considering HMRC records. Even when a reconciliation exercise has been performed and highlights some uncertainty, keeping scheme records as they are may be the less risky approach. There are many reasons why there could be differences and it is not the case that HMRC always held correct information – for example, HMRC may not have been issued with some records of earnings and the scheme data may be the more correct record.

However we answer the question “to reconcile or not to reconcile?” before we undertake GMP equalisation, the ideal outcome is to have a good audit trail backing up that decision.  The biggest risk is to ignore reconciliation; otherwise it could end up as a truly Shakespearian tragedy!