A Closing Window of Opportunity to Clean Up Member Data
Contracting out will come to an end in April 2016. After that two things will happen:
- Employers and staff will have to pay full National Insurance Contributions (the contracted out rate for NIC’s will cease to apply).
- Contracted out rights in pension schemes will cease to have any special status under overriding law.
Employers and trustees will need to decide how to tackle these changes but most immediately there is the issue of data reconciliation. Approximately 4500 schemes relating to nearly 7 million members have contracted out rights. Data held within these schemes should correspond with that held by the government. Currently the branch of HMRC responsible for this is NISPI (National Insurance Services to Pensions Industry). Once contracting out comes to an end NISPI will not be available to resolve queries and reconcile Guaranteed Minimum Pension (GMP). They will however be writing to all members informing them of the value of contracted out rights their records say the member is entitled to. This may well lead members to question their pension scheme benefit statement where these differ.
NISPI are offering a last chance to reconcile records. The right to register for this service will be withdrawn in April 2016. A huge number of schemes have already registered to take advantage of this service. But many have not yet acted. They need to do so before April 2016 when the opportunity to register ends.
The experience so far is that the error rate where government and corresponding scheme records do not agree is high. Figures of 40%- 50% failure are common (and higher figures have been seen in some cases).
But what is a GMP reconciliation?
The reconciliation allows administrators (reporting to trustees and employers) to check the contracting out records held by their scheme against those which HMRC have. This then presents an opportunity to resolve any differences between the two for practicality the approach is that any difference of a value less than £2 per week will be disregarded. There are two forms of reconciliation which can be adopted under the NISPI programme namely:
- Membership Reconciliation – this is a simple form of check that every member of the scheme in question with a contracted out history does indeed appear on HMRC records (and vice versa).
- Full Reconciliation – this will go beyond simply checking memberships to establish whether the scheme and HMRC records, benefit amounts etc. directly correspond (again ignoring minimal differences).
It is for the scheme in question to determine whether it wants to simply go for Membership Reconciliation or seek a Full Reconciliation checking off all relevant data.
HMRC / NISPI position is that the reconciliation exercise (for those who register before the cut off date of 6 April 2016) will cease in April 2018. Many industry commentators doubt however that there will be sufficient time to complete the exercise. This is the case even more, now that initial evidence from the review has identified significant differences between the records held by HMRC and those for contracted out schemes. Some errors were bound to creep in given the huge number of members affected, but whether the task government has given itself in such a short time frame is achievable appears highly questionable.
So Why Register for Reconciliation?
Many schemes will want to aim towards a ‘buy-out of benefits’ either in part or as a whole at some point. Insurers may levy a significant premium for those schemes which failed to take up the opportunity to reconcile records.
Trustees have a legal duty to ensure that benefits are correctly calculated. Trustees may have difficulty in justifying any failure to act particular in the light of evidence of errors having already come to the surface either within their own scheme or via HMRC. Remember that members will be notified by HMRC of the information and benefits which HMRC hold for that individual. So they will receive, it is understood, an end of contracting out statement. Large number of members may take the opportunity to ask their scheme to check its own records and explain any discrepancies or differences between the two sources of information.
Where a process exists to check data that goes back over many decades. Some schemes fail to take advantage of this, meaning they will be at a relative disadvantage to those schemes which have carried out the exercise. A member challenging the validity of records in relation to scheme which has failed to go through reconciliation would have little difficulty in demonstrating fault on the part of the trustees and employer especially where evidence from other reconciliations which have taken place so far has revealed high levels of discrepancy. Members may be able to make a case for data protection legislation head – based on the failure to take advantage of the reconciliation opportunity.