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Article | Pensions Briefing

GMP rectification: key considerations following GMP reconciliation

How should trustees adjust members’ pensions once GMP reconciliation is complete?

Pensions Corporate Consulting|Pension Board and Trustee Consulting

By David Fullalove and Neil Tooth | October 26, 2017

Trustees shouldn’t wait until GMP reconciliations are complete before considering the next phase of GMP rectification. David Fullalove and Neil Tooth take a look at the options available and issues to consider.

With many schemes now well on the way to completing their GMP reconciliation work, trustees and sponsors should start considering how to update members' benefits for changes in GMPs. David Fullalove and Neil Tooth take a look at the options available and the key issues to consider ahead of rectifying members' benefits.

Trustees will breathe a collective sigh of relief once all of their schemes' GMPs have been reconciled with HMRC's records, that is, for each GMP record, either agreeing that the scheme figure is correct or accepting HMRC's figure. However, that is not the end of the story. The next step for most schemes will be to consider how pensions should be adjusted where there are differences between their records and HMRC's records, and when they should implement any changes.

In some cases, adjustments could result in a noticeable impact on a member's pension. An increase is easy to explain, but a material reduction will place the trustees, the sponsor and their GMP rectification method in the spotlight.

How are benefits affected?

There are different methods of GMP rectification, each with its merits and drawbacks, and some more suited to particular circumstances than others. Hence, it is important that trustees and sponsors understand both the effects on benefits, and the impact of any approximations, in order to make an informed decision about the method (or methods) to adopt.

For members who have not yet retired, in many schemes it will often be possible to simply update their records to correct the split of their pension between the GMP and non-GMP elements. This should reflect the GMP amounts held by HMRC, without changing the total amount of pension at the date of leaving. Nonetheless, issues could still arise in certain cases if members have non-standard benefits, or where a scheme calculates and maintains a current deferred pension (which may be provided to members in an annual statement), or where there are gaps in the data.

Whilst members will not see any difference in the amount of their overall pension at the date of leaving, their pension at retirement will probably be different because GMP and non-GMP elements typically attract different rates of pension increases, both before and during retirement. Trustees should therefore also consider what quotations or projections have been provided to individual members, and how these could be impacted by the rectification exercise.

The position is more complicated for pensioner and dependant members whose pensions are already in payment. Depending on how the scheme and HMRC GMP records differ and the decisions made by the trustees, some members may see their overall pensions reduce and potentially have to pay the scheme back some of their pension. Even for members that see an increase in their overall pension, careful communication will be required to help them understand why this change has been made. The accuracy of the method used may affect calculations.

In many schemes, a fundamental question may be whether to reduce pensions and, if so, whether to reclaim over-payments. If this is proposed, it is important that trustees consult with their legal and actuarial advisors prior to making any changes to benefits in order to ensure that their duties as trustees are satisfied as well as to understand the potential funding impact of any changes.

What are the different methods to updating members' benefits in payment?

The table below sets out an overview of the main rectification methods typically being used by trustees following a GMP reconciliation exercise. It may be that different approaches are suitable for different groups of members.

Figure 1. Trade-off between accuracy and speed in GMP rectification

Figure 1. Trade-off between accuracy and speed in GMP rectification

Method Description Explanation
Forward-looking method No change is made to current pension, but it is re-split to allow for revised level of GMP in future pension increases. The most straightforward (and least expensive) method but this will not fully correct the position. It may be suitable for small changes, or if trustees decide not to reclaim past over-payments.
Delta method Current pension is adjusted by considering the change in GMP and non-GMP elements at the member's date of leaving, allowing for revaluation and increases (and any early or late retirement adjustment), to work out the revised pension as well as any over/under-payment since retirement. This should give the same answers as a full re-work of a member's pension, on the assumption that the underlying data is correct and any past practices (for example, early retirement terms) are unchanged, but it does mean any adjustment is only in relation to the change in the GMP.
Full rework of benefits Benefits at retirement are recalculated using revised GMPs to provide the true benefit entitlement allowing for any non-standard retirement terms and anti-franking checks, and including over/under-payment since retirement. This is likely to be the most time-consuming and requires complete and reliable backing data. This method may identify other issues or be complicated by other benefits.
Mixed A combination of the other methods to allow a proportionate approach for different groups of members, dependent on the materiality of the differences in GMPs. In practice, schemes may use a mix of methods for different groups of members to balance cost and reliability of the adjustments.

What else should trustees consider alongside deciding the method to adopt?

One key factor will be agreeing what will be done in the situation where pensions are currently being overpaid. A second is to agree appropriate threshold levels of materiality to assist with implementing any changes. It is usually sensible to frame these around the impact on benefits at retirement, in order to capture the varying impact of increases before retirement. Within this framework, trustees might choose to carry out a full rework of benefits for cases where the difference in GMPs with HMRC are relatively large, and adopt a more approximate method (for example, a forward-looking or delta method) where the differences are less material. Trustees may also be guided by any provisions in their scheme rules or standard procedures for other corrections.

Other key areas might typically include:

  • Whether to award interest in addition to any past under-payments and, if so, what level of interest to apply.
  • Whether to reapply any checks against the statutory minimum level of pension at GMP age (60 for females, 65 for males).
  • Any HMRC complications.
  • How changes will be communicated to members.

When should trustees update members' benefits?

HMRC have previously indicated that they may send a communication in 2018 to all individuals under State Pension age with a GMP entitlement. This may prompt some members to check whether their scheme records concur with HMRC's. However, the exact form of this communication is still unknown at present, and this plan may be subject to change.

Whilst this provides a natural opportunity for trustees to communicate with members around any changes to GMPs, trustees should also consider how this fits in with other exercises. For example, if any other data cleanse activities (such as calculating contingent spouses' pensions) need to be addressed, and how this might interact with any future GMP equalisation exercise. Combining projects may make it easier to update systems, streamline member communications and reduce costs.

Trustees should also be mindful of the timing of their regular pension increases, and ensure that their administrators have the resources to implement any adjustments to benefits, address member queries as well as carry on with their business as usual activities.

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