PensionsSep 20 2018

Why schemes are asking pensioners for their cash back

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Why schemes are asking pensioners for their cash back

The issue with clawback on GMP relates to people whose occupational pension scheme was contracted out of the state earnings-related pension scheme (Serps).

Contracting out meant schemes could opt out of Serps, so that individual members would not be tripling up on pension benefits by building up a basic state pension, Serps, and an earnings-related occupational pension.

As Sir Steve Webb, director of policy for Royal London, puts it: "Contracting out was essentially a deal between an employer offering a workplace pension and the government."

Provided the scheme offered a pension of a guaranteed minimum level - a guaranteed minimum pension (GMP) - then the employer and employee would be allowed to pay a reduced rate of national insurance (NI) contributions and the worker would no longer build up rights under Serps.

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. Ros Altmann

Mr Webb adds the vast majority of occupational defined benefit pension schemes were contracted out post-1978, including pretty much anyone who worked in the public sector.

This means there are tens of thousands of people entering pensionhood now or who have already taken their pension, who were contracted out in the late 1970s and early 1980s from private and public schemes.

He adds: "One consequence of this arrangement is that there is a complex and close relationship between your occupational pension or GMP, and your state pension.  

"Broadly speaking, when your state pension is worked out, the bit that the scheme has promised to pay – the GMP – is deducted from your state pension. This means that if the GMP is wrong, your state pension can be wrong as well."

Anomalies

And many GMP calculations are indeed wrong. Back in 2016, HMRC discovered some pensioners had been paid contributions to their national insurance (NI) when in fact they were contracted out.

This means some pensioners have been overpaid each month; conversely, calculation errors for other individuals mean they have been underpaid.

Since the anomalies were uncovered, HM Revenue & Customs has been issuing a number of Countdown Bulletins to schemes in order to provide guidance on how to rectify the problem.

Keeley Paddon, head of technical for the SimplyBiz Group, says: "These clawbacks related to GMP reconciliations that are now being undertaken by DB schemes.

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. Kay Ingram

"HMRC have advised that schemes have until October 2018 to check their scheme records for any individual who has historically been contracted out."

This has meant the tax office, together with pension schemes, have been on a mission to recoup those missing GMP contributions - which amount to millions of pounds - and are reported to be affecting tens of thousands of pensioners in the UK. 

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."

So far, so good: the process of making sure everything is correct lies with both HMRC and the scheme. 

Yet the scheme is ultimately responsible for carrying out the reconciliations, updating their records and keeping accurate documentation.

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. John Lawson

As Mr Lawson comments, it is also the scheme's responsibility not just to ensure GMP records are "correct and match those held by HMRC", but also to maintain a correct record of the GMP.

The fact this has not happened, and therefore many pensioners will be asked to repay money they may already have spent, is, according to Phil McGovern, managing director of MPA Financial Management, "pretty scandalous".

He comments: "It is pretty scandalous in many ways, as it is not the pensioners who have done any wrong, but a combination of scheme administrators and government."

Next steps

Because of the scale of the reconciliation process so far, HMRC recently extended the period for queries to be answered from December 2018 to March 2019. Yet despite this, schemes are concerned about whose job it is to inform affected individuals, with HMRC passing this responsibility onto the scheme itself.

Ms Paddon explains: "Under previous guidance, many schemes have already undertaken the calculations to reconcile GMPs on the understanding that all affected individuals (under State Pension Age as 6 April 2016) would be automatically written to by HMRC.

"However HMRC has now announced that it will not issue statements to individuals as planned. HMRC now believes individuals have or will have access to this information through other means, such as the existing state pension scheme forecast and the on/off proposals of the pensions dashboard.”

So schemes must bear an additional responsibility in informing all potentially affected individuals, while HMRC takes a back seat and waits for schemes to finish their reconciliation, and then to decide whether to take the hit themselves or send out begging letters to unsuspecting pensioners. 

It remains to be seen at the end of the year the full scale and cost of the exercise, not just the time/cost on schemes involved in carrying out the reconciliation but also the volume of money that will have to be clawed back from some individuals or repaid to others. 

Will this be the end of the matter? Not according to Ms Altmann, who warns the same lack of attention that caused the GMP issues is being repeated in the defined contribution world of auto-enrolment.

She laments: "With my work at PensionSync showing the contributions being made for auto-enrolled workers not being properly checked, there may still be many errors that may not be discovered unless a proper system of reporting of errors and random checks on accuracy are introduced."

simoney.kyriakou@ft.com