Are You Ready ?

With the abolition of defined benefit contracting-out less than a year away, trustees of contracted-out salary related (COSR) schemes need to begin taking active steps to ensure their GMP records match those held by HMRC, beginning with registering for HMRC’s scheme reconciliation service prior to April 2016.

What are GMPs?

For many years both occupational and personal pension schemes could contract out of the additional state pension (formerly the state earnings related pension scheme (SERPS) and the state second pension) and instead provide alternative top-up benefits outside the state system [1].

Guaranteed Minimum Pensions (GMPs) apply to members of COSR schemes who contracted out of SERPS between 1978 and 1997 and are intended to provide those members with pensions that are at least equivalent to what they would have earned under SERPS.

What happens next?

The option to contract-out of the additional state pension for COSR schemes will come to an end in April 2016 when the single-tier state pension is introduced.

When contracting-out ends, HMRC will issue closure schedules to schemes (currently planned for December 2016) so they can compare these against GMP amounts held in their own records. This is known as GMP reconciliation.

Following this, HMRC is planning – from December 2018 onwards – to write to all members with contracted out benefits (approximately 20 million across more than 4,000 schemes) to confirm what their GMP entitlement is, and who is responsible for paying it.

Until December 2018, schemes will be able to challenge the closure schedules issued by HMRC where these are inconsistent with their own records. However, schemes will only be able to challenge the information held by HMRC if they have registered for the scheme reconciliation service. Registration must occur by April 2016 and late requests will not be considered. After 2018, HMRC will assume its records are correct.

What do trustees need to be doing?

If they haven’t already, trustees need to begin conducting reconciliation exercises to ensure their scheme’s GMP information is accurate and up-to date and accords with the information held by HMRC. Trustees should consider:

  • discussing the issue of GMP reconciliation with the scheme’s administrator;
  • seeking fee estimates from data specialists to conduct initial data reviews;
  • instructing specialists to carry out a full reconciliation exercise (which involves registering for the scheme reconciliation service to enable a review of the HMRC data and an investigation into any discrepancies to be carried out). Depending on the size of the scheme, this can typically take up to two years to complete;
  • introducing a ‘tolerance level’ (below which the trustees will simply accept HMRC’s information without further information);
  • taking legal advice where issues of over or under-payments arise (given the different levels of indexation that apply to the GMP element of a member’s benefits, it is not uncommon for incorrectly calculated GMP splits to result in over or under-payments); and
  • communicating with the members regarding the reconciliation exercise and its outcome – in particular, any incorrectly calculated benefits will need to be carefully communicated.

Given the tight timescales involved, trustees of COSR schemes need to be treating GMP reconciliation as a priority in the coming months. With reconciliation exercises for larger schemes typically taking two years to complete, trustees should ensure steps are well underway to meet HMRC’s 2018 deadline and ensure they avoid any criticism for failing to properly investigate any material errors or discrepancies in their scheme’s GMP data.

This post was contributed by Paul Wild. For more information, email

[1] The abolition of defined contribution contracting out occurred on 6 April 2012

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.