We are rapidly approaching the end of contracting-out in April 2016. Gillian Hickey at Trafalgar House says what schemes can do to meet the 2018 deadline.

Action points

  • Register – if you haven’t already done so, go to www.gov.uk/guidance/nispi-pension-schemes-reconciliation-services and register your scheme

  • Analyse – complete the analysis of scheme records against HMRC as early as possible, as this will reveal how big the reconciliation project is likely to be

  • Prepare – GMP reconciliations are time consuming, so work with your administrator to plan and resource each stage of the project in advance

Do I need to reconcile my scheme liabilities?

The short answer is yes. Contracting-out started way back in 1978, when most pension scheme records were not computerised and record-keeping standards may not have been quite what they are today.

This often means that HMRC data includes a contracted-out liability where one no longer exists. This could be a member who has long since transferred out of the scheme but the CA form was not received by HMRC, or a member who received a refund, but a contributions equivalent premium was not paid.

There is no shortcut to reconciling contracted-out liabilities, and it is often time consuming. However, it is better to deal with any issues now while it is still possible to correct them, rather than risk the scheme making incorrect payments to members or being responsible for liabilities that should no longer exist.

What are the deadlines?

In preparation for the cessation of contracting-out, HMRC launched the Scheme Reconciliation Service in 2014.

After December 2018, the ladder is effectively pulled up and HMRC will write to all individuals who have a GMP entitlement 

The SRS provides a list of contracted-out periods and GMP data for members who have left contracted-out service (ie deferred, pensioner and dependant members). This allows schemes to compare the data held on their administration records against that held by HMRC – the first step in the reconciliation process.

Registration for the SRS has been open since December 2013 and online registration closes on April 5 2016.

From April 6 2016, three things will happen:

  • HMRC will assume that schemes that have not registered for the SRS are content with the accuracy of their data.

  • HMRC will no longer track the movement of contracted-out rights. Administrators will no longer need to submit termination, transfer or buyout notifications for movements from April 6 2016 (although they will still be accepted for movements before this date).

  • HMRC will no longer issue a statement of pension liability when a member reaches state pension age.

Schemes that have registered for the SRS and have received data will be able to submit queries up until October 2018, and HMRC will provide support for these until December 2018. After this date, the ladder is effectively pulled up and HMRC will write to all individuals who have a GMP entitlement.

What about active members?

Active member data will be made available through the SRS from December 2016 after HMRC has closed all active member records.

What else do I need to consider?

Analyse scheme records against HMRC data as soon as possible, as this will show the scale of the task ahead. However, there are a few items common across all GMP reconciliations that should be considered up front:

  • Understand the scheme’s contracting-out history, especially where there have been mergers and acquisitions.

  • Collate information on historical bulk member movements such as buyouts, bulk transfers and trivial commutation exercises.

  • If possible, obtain historical accounting and cash flow records that show refunds and CEP payments.

In our experience, understanding and being prepared in these key areas will help to resolve a large number of discrepancies from the initial comparison.

Once the membership has been reconciled, GMP discrepancies will need to be resolved. Schemes should decide on a tolerance level within which they will accept HMRC data and update their records.

A tolerance of £2 a week has been widely adopted across the industry and could significantly reduce the number of queries and investigations needed to complete the project.

If your scheme has not yet started its GMP reconciliation, it is not too late. However, a quick start and planning in advance will be critical to completing the project on time.

Gillian Hickey is a senior business analyst at Trafalgar House Pensions Administration

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