GMPs – Breaking up is hard to do
Geraldine Brassett, Client Director at Aon Hewitt, explains why schemes
cannot afford to delay or defer the reconciliation of their Guaranteed
Minimum Pensions (GMPs)
If I said to you that you had a significant piece of work to undertake, that it
has the potential to be material to the strategy for your pension scheme and
could impact your liabilities, that you only had a finite amount of time to
complete the work, and that there would be increased demand for
diminishing resources with the required skills, knowledge and experience to
do the work, would you put it on the back burner?
You would probably say “definitely not.” And yet, many schemes are not yet
recognising that this challenge is precisely what they will encounter in relation
to reconciling their Guaranteed Minimum Pensions (GMPs) and are choosing
to delay or defer this significant piece of work. Can you afford to do this?
Below we explore why taking action now is important.
Our article’s title could be a cue for a song but actually examines our
relationship with that stalwart of pensions, the GMP, and the fact that we may
soon be breaking up.
This year it will be 36 years since the introduction of the GMP. Some of us, who
started our careers in pensions administration learning how to calculate a
GMP manually, have seen significant changes in the approach to
contracting out. The GMP however, has been a constant in many respects.
By any standards a 36 year relationship is long one and so it is understandable
that those of us who have pretty much been on the whole journey will go
through a range of emotions from shock to acceptance as the relationship
comes to an end. Before we come to that though, how well do we really
know our own GMPs?
In the past, to get this knowledge you would have to ‘call it a day’ by
surrendering the contracting out certificate. HMRC would then provide
details of all GMP amounts held by them in relation to that SCON (Scheme
Contracting Out Number) with useful little nuggets of information like
amounts, dates of leaving and so on.
Recognising the challenges to come, HMRC have introduced a new service
to help us. This means we can now get to know our GMPs better whilst
prolonging our relationship. From April 2014, it is possible to get information
from HMRC which is close to a full reconciliation without surrendering the
contracting out certificate. On application (and you can apply now) HMRC
will send details of all GMPs for deferred and pensioner members in relation to
one (or more) SCONs. This will enable reconciliation of those records but will
also identify any GMP liabilities held by HMRC which we believe have been
discharged.
So, why would you want to undertake something so potentially painful now
when you could save yourself the pain for a while? Well, there are a number
of reasons:
 Contracting out for Defined Benefit schemes will cease in April 2016,
after which all schemes contracted out at that date will need to
undertake a full reconciliation. Resources and knowledge from
administration providers and possibly also from HMRC will be in
significant demand at this time and so may prove difficult to secure.
 At some point in the future, the end of the relationship is going to be
made public and HMRC is proposing to write to everyone they hold a
GMP for with confirmation of their entitlement including the amount.
When this happens you will want to ensure that the information they
issue is correct and member expectations are correctly set.
 You actually may already have parted company with your GMP
before then through a process of equalisation and conversion which in
itself will require clean and reconciled GMP data.
We have learned from past experiences that reconciling GMP information
takes a long time, is a complex process that needs to be carefully controlled
and almost always reveals a skeleton (or two) in the cupboard.
Each relationship is different but here are the some idiosyncrasies that could
make you think differently about your GMPs:
 Bulk Transfers – If HMRC has been informed of membership transfers
both into and out of schemes there is no problem. In reality, during the
frenzied activity going on at the point of a company merger or demerger, these transfer notifications are commonly overlooked and so
members will either be missing from or are still held on the former (and
now incorrect) SCON.
 Women with a normal retirement age after 60 – Any person retiring
after GMP Age (i.e. a woman aged 62) will attract a Late Payment
Increment. This increases the GMP and so impacts both the scheme
GMP and State Benefits. Again, if HMRC aren’t aware of these
members the GMP amounts will differ.
 Changing administrators – Industry practice is to only migrate scheme
data for live scheme members. This means data for all closed or ‘no
liability’ members can be either archived or dumped. A GMP
reconciliation commonly discovers remaining (and unknown) liability
for an average of 10-15% of this population. For example, this might be
a case where the member transferred out in 1984 to another scheme
and, as the form to advise HMRC of this transfer was not completed,
HMRC still think the member is in the scheme and hence a GMP liability
still exists.
 Where a member left and took a refund of contributions but the
premium payment to reinstate the GMP was never paid.
These are issues that become visible when a scheme reconciles their GMPs.
The longer these issues are ignored or swept under the carpet, the harder
they are to resolve due to the natural loss of data integrity over time.
Whilst knowledge is power, there are still difficult decisions to make along the
way. As they say, the course of true love never runs smooth.
Help with such decisions will require third party input and typically that will
come from the trustees to the scheme. Decisions will need to be made on:
 What tolerance the scheme wishes to set where figures held differ to
those supplied by HMRC – while the Pensions Regulator has suggested
a tolerance level of £2 per week, the amount a scheme wishes to use
remains the decision of the trustees.
A higher tolerance e.g. £5 per week would capture more members
and mean less time/cost spent on individual investigation. However,
accepting HMRC figures up to this tolerance does increase the
potential of accepting a figure where HMRC have the wrong details
recorded. HMRC are wrong more often than many people realise. Our
experience shows that often trustees will want to model the impact of
different tolerances.
 Under and overpayments - where a GMP is incorrect, benefit
recalculations will result in either an over or underpayment. The norm,
in our experience, is that trustees will set the pension to the correct
level going forward but do they write off past overpayments? And
what are the legal considerations?
 The optimum method for achieving reconciliation - can work be
automated or does it need to be a case by case review? What are
the associated costs and implications of each option?
 What happens if the data or information needed simply no longer
exists or needs to be recreated in some form?
 Under what circumstances will HMRC information be accepted without
question and where does it make sense to challenge?
There is of course, nothing like investing in a relationship to reap the benefits
and whilst the above focuses on the benefits resulting from actions we need
to take, undertaking this type of exercise can also facilitate other objectives
such as derisking projects and greater clarity of liabilities.
Rather than spend many more years with our GMPs while the requirement to
provide them effectively runs off, we may end up going through a process of
equalisation and possibly conversion. At the moment we do not fully
understand what this may entail, but what we do know is that if we do not
understand our GMP liabilities, the way our GMP data is held and that the
splits of our pensions are correct, we are looking at a much more lengthy and
costly exercise. Clean GMP data will also help individual members in
understanding their own relationships with their GMPs and why change might
be necessary.
And so whilst I might miss my old GMP friend, I am sure that simplifying this
aspect of pensions can only benefit the next generation of pension
administrators and ultimately help members better understand their benefits.
Parting is such sweet sorrow….
Nothing in this document should be treated as an authoritative statement of the law on any particular
aspect or in any specific case. It should not be taken as financial advice and action should not be taken
as a result of this document alone. Individuals are recommended to seek independent financial advice in
respect of their own personal circumstances
Aon Hewitt Limited is registered in England & Wales. Registered No. 4396810.
Registered Office: 8 Devonshire Square, London EC2M 4PL
Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority
Follow us on twitter @aonhewittuk