The end of contracting out – Less than 12 months to go!

13th May, 2015

  • HMRC has published its seventh Countdown Bulletin relating to the ending of contracting out in April 2016.  This newsletter highlights that there are less than 12 months until the end of contracting out.

    Trustees need to ensure that their schemes are appropriately prepared for the abolition of contracting out.

    All schemes with a liability for Guaranteed Minimum Pensions (GMPs) should undertake a reconciliation exercise.  This means that employers and trustees need to ensure that their scheme records are up to date and hold the same information about Guaranteed Minimum Pensions (GMPs) as HMRC currently hold.  When contracting out comes to an end, HMRC will cease to keep records of GMPs. The importance of reconciling GMPs cannot be overstated – after December 2018, there will be no recourse to HMRC regarding GMP amounts.

    This is a major project for the trustees of all schemes that retain a liability for GMPs.  It is not just another compliance exercise that has to be carried out to satisfy rules and regulations; it will result in the following benefits too:

    • Making sure that the correct benefits are paid to the right scheme members at the right time.
    • Ensuring that scheme data is accurate. If a de-risking exercise is subsequently carried out, accurate data can result in significant savings when benefits are bought out with an insurance company.
    • Addressing GMP queries and inequalities in the scheme.

    From April 2014, HMRC has offered a Scheme Reconciliation Service to enable pension administrators to reconcile the contracted-out membership and GMP information held on scheme records against the information held on HMRC records.  Schemes need to register with HMRC urgently as it is on a first-come, first-served basis before they close down.

    For schemes that are still contracted – out of S2P, employers and trustees will need to consider the impact of the end of contracting out on the scheme status and benefits. This will result in consultation and communication with the members on changes to the scheme and subsequent scheme rule amendments.

    For all schemes that have been or are contracted out on a salary-related basis, the trustees’ scheme administrator should be registering for the HMRC reconciliation service urgently (registration must be before April 2016) with a view to undertaking a reconciliation exercise to ensure that HMRC and your scheme hold the same GMP information for each employee.

    If not already started, trustees urgently need to take advice to get the GMP reconciliation project underway.

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