From December 2018, HMRC will no longer offer schemes the ability to reconcile GMP entitlements. Schemes that do not take the opportunity to conduct an exercise now risk leaving themselves open to claims for benefits from non-members and limiting certainty over liabilities.
With contracting out being abolished with effect from April 2016, Trustees need to consider how to deal with reconciling legacy Guaranteed Minimum Pension (GMP) liabilities with HMRC. From December 2018, HM Revenue & Customs will begin sending statements to several million people who have a GMP entitlement, giving them visibility of which schemes will be responsible for paying them a GMP in retirement.
Whilst GMP reconciliation has rarely been a hot topic on Trustee meeting agendas, there can be a real financial impact to schemes if Trustees do not give such exercises due care and attention.
There are three key challenges facing Trustees: Trustees (and sponsors) often question the merits of carrying out a GMP reconciliation when considering the cost/benefit scenario. However, a well-run process need not produce significant costs when compared to the benefit for members and the scheme, if the exercise is planned properly.
Knowing your membership
It is not uncommon for HMRC to record members with a GMP liability in a scheme from which they transferred many years ago or, in some cases, never even joined.
Inconsistencies between data held by HMRC and that held by the scheme can result in changes to a scheme’s liabilities.
Future-proofing your data
This represents the final opportunity to reconcile GMP data with HMRC; schemes that fail to do so may see any future insurance options become more expensive as a result of not having “clean” data.
What type of exercise should you run? The answer to this question largely depends on the Trustees’ attitude to risk and appetite to adopt pragmatic decisions. There are broadly three potential options:
Trustees need to consider the merits of each option gainst practical factors, such as resource availability, me constraints and cost, when balanced with theiruty to provide members with the correct benefitsnder the scheme.
How can you effectively manage cost? Trustees can be understandably nervous about signing up for an exercise where it is difficult for administrators to accurately predict the cost at the outset. However, there are a number of ways in which Trustees can encourage their administrators to deliver the exercise cost-effectively:
Schemes which do not take the opportunity to conduct an exercise now leave themselves open to risk of unexpected liabilities. There can be real financial impact as well as implications in connection with insured solutions further down the line.