What is SERPS?
SERPS, State Earnings Related Pension Scheme, was part of the State Pension (recently known as the State Second Pension). It’s the amount on top of the basic state pension and the level depends on National Insurance (NI) contributions made. There have been several changes to the State Pension Scheme since, including moving to a flat rate pension from April 2016.
What does contracted out mean?
Contracted out meant that the members of the contracted out pension schemes were giving up their right to the additional top-up in State Pension, in exchange for their scheme guaranteeing a minimum pension i.e. GMP.
If GMP accrual ceased in 1997, why are schemes still contracted out?
HMRC in fact announced that from 5 April 2016, it will not allow schemes to contract out (this ties in with bringing in a flat rate pension) and thus they want to stop the support provided for the administration of GMP rights. This support often came in the form of reconciling data to ensure the calculations were based on accurate information such as length and dates of service and salary.
What does this mean for pension schemes?
Scheme administrators and actuaries would normally only look at validating the GMP when the pension was coming into payment, or in bulk only when scheme was in wind-up. However, as HMRC has indicated they will be stopping the admin support for GMPs, schemes wishing to validate GMP records must be proactive.
Schemes are therefore advised to undertake a reconciliation of the data they hold with that held by HMRC using an internet based Scheme Reconciliation Service (SRS) set up specifically to resolve differences in GMP records held by schemes and HMRC. Schemes wanting to avail of SRS will need to register by April 2016.
Are schemes required to undertake this reconciliation?
There is no compulsion but it is considered good practice as not reconciling could cause issues. DWP is thus incentivising schemes to reconcile GMP data, by indicating that scheme trustees may be subject to claims if the scheme’s record of GMP entitlement is different to that held by the DWP.
How would members know if data held by the scheme is correct, to otherwise raise a claim?
DWP in December 2018 will issue individuals with a “Foundation Statement” providing a summary of their GMP entitlement and the employer/pension scheme(s) responsible for the provision.
If the data held by DWP is more generous than that by the scheme, then scheme members or their family will be in a strong position to make a claim from the trustees. Therefore, trustees are encouraged to use SRS in order to reconcile the GMP records held by the scheme and HMRC.
So that’s it? April 2016 is the cut-off period?
Yes and no. National Insurance Service to the Pensions Industry (NISPI) has been maintaining records of contracted-out employment, but its services are expected to discontinue from 2018, with the
GMP tracking ceasing from April 2016. Schemes will be legally required to pay GMP in line with required increases even after 2018 however.
What issues do pension schemes and trustees face?
Time! A few years may be insufficient to undertake what is potentially a mammoth task of data reconciliation, given differences will also need to be resolved. Companies may not simply accept HMRC records where the information they hold is materially different.
The requirement also comes at a time when schemes are already having to grapple with numerous other legislative changes, what with increased flexibility in pensions and the other issues resulting from cessation of contracting out.
It is likely that scheme administrators will need additional resource to meet trustee needs to complete the reconciliations by 2018.