Why schemes are asking pensioners for their cash back

This article is part of
How to make sense of GMP clawback

Key figures

Pensioners in private sector schemes who might be affected is high enough, at approximately 43,600 individuals.

Yet the majority of affected pensioners seem to be in large public sector pension schemes, some of which have hundreds of thousands of pensioners.

Some schemes have said they will not attempt to recover excess payments made to its members in cases where overpayments have been made.  

For example, FTAdviser reported in April that the Civil Service Pension Scheme (CSPS), with 662,000 pensioners, has decided not to recover excess payments made to its members of £22m.

Baroness Ros Altmann, former pensions minister, also points out the CSPS is the scheme to which HMRC and Treasury officials belong to. One must draw one's own conclusions.

Kay Ingram, director of public policy for LEBC, elaborates: "Trustees are legally entitled to request repayment of overpaid pensions, as long as their claim meets certain time frames, and the reason for the incorrect payment was not their fault."

The true scale of the problem can be gleaned from the following statistics: 

  • Back in 2016, when the issue was raised, it was suggested 1 per cent of defined benefit members with pensions in payment could have material over or under payments.
  • According to the Pension Protection Fund Purple Book, in 2016 there were 10.9m members in DB pension schemes, 40 per cent of which were pensioners in receipt of an income. 
  • Initial estimates suggested approximately 43,600 individuals in private schemes could have to give back up to £50,000 already received from their company pensions as schemes update their contracting out data.
  • However, with the reconciliation process nearly ended, there could be thousands more. 

Regardless of whether schemes decide to claw back money or to absorb the cost themselves, Ms Altmann says the financial impact of GMP reconciliation won't end after the process has stopped.

She explains: "People who were on the wrong pension will be paid the correct amount in future, which could mean they have a reduced pension all of a sudden."

Ms Ingram reiterates this point: "Members may see future pension payments adjusted. Where there is underpayment, the trustees are obliged to make this good to the member.

"In most cases the adjustments are relatively modest amounts, but for some older pensioners this could run into several thousands of pounds of repayment demanded."

The process of reconciliation 

The fact the reconciliation process has turned out to be far more complicated and far-reaching than originally believed has been recognised by the tax office. 

"The exercise of reconciliation has revealed a significant problem of poor record-keeping, which was never properly corrected. Many of these errors go back decades," Ms Altmann adds.

"They reflect the lack of care and investment in ensuring administration systems are correct, the lack of attention to checking contribution accuracy and a lack of ongoing attention to ensuring all contribution and member records are correct."

John Lawson, head of policy for Aviva, points out: "HMRC - on behalf of the taxpayer - has a shared responsibility with the scheme to pay for indexation of GMPs once in payment.

"It is therefore important that the GMP is calculated correctly, otherwise members of DB schemes could get a higher or lower state pension than they are entitled to."