Taking a proactive approach to the Guaranteed Minimum Pension (GMP) reconciliation issue
There’s nothing quite like a tight deadline to get the pulses racing in the world of pensions. The arrival of the new single-tier state pension and the end of contracting out from April 2016 does just that, forcing pension schemes to proactively deal with the Guaranteed Minimum Pension (GMP) reconciliation issue.
Completing the GMP reconciliation came out as the No. 1 issue faced by pension schemes in our Pension Scheme Insight Report 2016, as highlighted by the 54% of pension scheme managers and trustees who participated in our research. But it is not just the deadlines creeping ever closer, but the scale of the job involved – it is no wonder therefore that it has become a burning issue for some many with responsibilities for trust-based pension schemes.
We have three key pieces of advice for schemes:
- Register with Her Majesty’s Revenue & Customs (HMRC) before the April 2016 deadline
- Put a proper plan in place to deal with your GMP reconciliations
- Beat the queues
Don't miss the deadline
Schemes have until 5 April 2016 to register with HMRC which is the final date that schemes that have GMPs can request data under the Scheme Reconciliation Service that HMRC established. Miss this deadline and schemes will not receive HMRC’s data for deferreds and pensioners for their reconciliation.
We have been carrying out GMP reconciliations since 2002 and in our experience it is common to find that less than 20% of records agree. This could be because HMRC has a record of a member that the scheme doesn’t, it could be because the scheme has a record of a member that HMRC doesn’t hold, or it could be that the GMP amounts differ.
When completing your GMP reconciliation process it is important to state straight out that the burden of proof is with the scheme.
What this effectively means is that if you do not carry out this exercise you will be stuck with HMRC’s records – there will be no recourse for appeal. And if just 20% of it agrees with your own records you may be unnecessarily burdened with some unexpected and unfunded liabilities in your scheme.
You will have to comply with HMRC’s GMP records, regardless of whether you believe they are right or wrong. We’ll say once again: the burden of proof is with the scheme and you need to get HMRC’s records on GMP to make any kind of case and comparison.
The only way that schemes will understand whether their records match will be to compare this with HMRC’s records. And you can only match records by registering by 5 April 2016. It’s essential.
Taking a Business As Usual (BAU) approach will not be enough
GMP reconciliations themselves are not that complicated (certainly not in a pensions context that is). But what really challenges schemes is the fact they are so time consuming.
The scale of the job will very much depend on how skewed your scheme records are when matched against those held by HMRC. We have over 300 GMP reconciliation cases currently in the pipeline and have completed 150 GMP reconciliation exercises to date: it may be of little surprise to learn that not one of these schemes had GMP data that perfectly matched with HMRC’s data. Each required significant work.
The quality and completeness of contracting-out data held by schemes also has an impact on the time it takes to complete a reconciliation exercise. For instance, data held on pension systems is generally easier to work with and more complete than data that is held on payroll records. Any scheme that has to rely on historical payroll records to help, especially those in the public sector, will have more difficulty completing their GMP reconciliation exercise.
There will be very few schemes that can fully absorb their own GMP reconciliations taking a BAU approach. Furthermore, the difficulty in bringing in GMP specialists is a much cited issue from schemes we have had discussions with.
It is incredibly difficult to try and absorb this exercise – specialists are needed.
Our dedicated team of 120 has been in place for a long time, not just created in the last 18 months in light of the cessation of contracting out. We have been living GMP reconciliations since 2002 as a result of our work with the Pension Protection Fund (PPF) and this means we have an in-depth knowledge of the GMP reconciliation process, fine-tuning it to get it right. We have worked closely with HMRC to develop the processes that now underpin these exercises – experience is paramount. This isn’t simply theoretical – we’re doing this!! We have successfully completed over 150 reconciliations on behalf of client and we have over 300 cases that we are actively working on. We process 7,000 queries a week. Not many companies can say that.
Beat the queues
The scale of the work for HMRC is extraordinary. This is a huge challenge for HMRC and the resources it has put in place will be strongly tested. The ultimate deadline is December 2018 and after that, if schemes have not been reconciled, you will have to accept HMRC’s data, whether you believe it is right or not.
We cannot work on the assumption that HMRC will push back its deadlines. Whilst there is sadly no way that schemes can push their way to the front of HMRC’s queue, making sure you are there as early as possible gives you the best chance of having everything agreed before December 2018. A recent 16,000 member scheme that we helped to reconcile GMP’s took over 9 months to complete – not everything runs swimmingly and we are very dependent on all parties following up on action points in order to progress. So give yourself as much time as possible.
It is crucial to be proactive about the GMP reconciliation, simply because until we take a good look at the data and compare with HMRC’s data, we don’t know how much work will be involved.
The report shows more than half (54 per cent) of managers and trustees cite GMP reconciliation as the major challenge for the next 12 months, making it the most commonly cited demand among pension managers and trustees.Find out how we can help you
Pension Scheme Insight Report 2016
The Pension Scheme Insight Report 2016 is aimed at those responsible for designing pensions and employee benefits programmes in the workplace.Download your copy