I was somewhat surprised recently to see an article about GMP reconciliation on the front page of the Daily Telegraph. They didn’t actually use that term but the message was clear – “tens of thousands” of pension scheme members are being asked to return over-payments of pensions arising from errors made over many years, following a trawl of records by HMRC. It was also noted that some people would be receiving back-payments, but “without any interest or compensation”. Headline grabbing stuff for an obscure area of pensions administration.
Many schemes are now reaching the final stages of reconciling their contracted-out records and GMPs with HMRC, before the shutters come down on the submission of new queries on 31 October 2018. Responses to those last queries are due in “early 2019”. Once you have gone as far as you can with challenging GMP calculations, you then have to decide what to do with the final GMP figures, where these are different to those that the scheme has been using for up to 40 years.
It’s hard to generalise about the impact on a member of a GMP being too high or too low. GMPs usually have a higher rate of revaluation in deferment, which will affect those members who did not retire at GMP age from active membership. Conversely, once in payment, GMPs may have the same, higher, or lower increases to pension than non-GMP, depending on the scheme’s own rules. Unscrambling a calculation back to the date of leaving, through revaluation in deferment and increases after retirement, and then recreating each year’s payment using the correct GMP is a time-consuming business – but it’s the only way to know for sure whether a pensioner has been over or under paid in aggregate.
Once they know the actual position, trustees then have to decide on the action to be taken. In the case of an overall underpaid position, I think there is little choice but to make good the shortfall – but the question of whether or not to add interest and, if so, at what rate, is one for the trustees to consider and practice will vary from scheme to scheme. Where the back-payment is large, this may tip the member into a higher tax bracket for the year. This can be avoided by providing a breakdown of the payment year by year, with interest shown separately, and HMRC will treat each payment according to the year it was due if provided with this information. The pension also needs to be increased to the correct level going forward.
Where there is an overpayment, the treatment is more tricky. This is not the type of error that a member could have been expected to spot, so to demand that excess payments are returned seems a little unfair. On the other hand, trustees are required to pay the benefits that are due under the Rules. For this reason, many schemes are taking the approach of writing off any overpayments but reducing the pension to the adjusted amount for future payments only.
MPs and other commentators have been effectively calling for this approach, which does feel like the fairest treatment for those affected. For many schemes, the overall financial impact may be small. But, as ever, someone has to pick up the cost of the asymmetric method of making good underpayments but not clawing back the overpayments, and that someone is, of course, the sponsoring employer for private sector schemes and the taxpayer for the public sector.
It will of course be good to bring an end to some of the complexities of contracting-out that began in 1978. Once the reconciliation and rectification of GMPs is complete, then (subject to the outcome in the Lloyds Bank High Court case) we can start to think about equalisation…
Alison Bostock, Client Director, PTL.
