As pensions industry deadlines go, it could be argued that 6 April 2016 does not top the list of most feverishly anticipated dates, or even come second.  In recent times, those accolades must surely go to ‘A’ Day, which brought us pensions ‘simplification’ in 2006 (who could forget) and 1 October 2012, when auto enrolment arrived.

Nevertheless, the cessation of contracting-out on a salary related basis is almost upon us, and with it the end of another era in pensions administration.  We have covered the issue in a number of blogs this year and last (‘GMP reconciliation – are you ready? and ‘The employer’s pensions agenda in January 2016 – top 5 action points).  However we make no apologies for returning to the subject for one last brief reminder of actions required, for in the words of the athlete Jackie Joyner-Kersee: “It’s better to look ahead and prepare than to look back and regret”.

Abolition of contracting-out

Employers with defined benefit occupational pension schemes which are open to the future accrual of benefits and are currently contracted-out on a salary related basis should be:

  • Deciding what steps to take (if any) to mitigate increased National Insurance costs and considering pensions and employment law implications of any proposed changes.  The employer can make use of a statutory override if it wishes to increase member contributions for future service.
  • Communicating the increase in National Insurance costs to members and formally consulting members on changes, if applicable.
  • If the scheme is used for auto enrolment compliance, considering which of the existing or new ‘quality requirements’ it can meet, now that simply being contracted-out will not suffice to meet the quality requirement.

Revaluation of Guaranteed Minimum Pensions (GMPs)

Currently, GMPs may be revalued on a fixed rate basis from the point at which a member leaves contracted-out service.  The relevant statutory provisions have been amended to enable fixed rate revaluation to be applied from the date on which a member ceases to be in pensionable service, rather than contracted-out service.  Trustees can take advantage of a statutory amendment power to achieve this position if their rules do not currently permit them to apply fixed rate revaluation from the date on which a member ceases to be in pensionable service, if this date is later than the date on which they cease to be in contracted-out service.

Making this change will ensure trustees are not obliged to apply the potentially higher level of revaluation from 6 April 2016, when all active members who were accruing benefits on a contracted-out basis will cease to be in contracted-out service.  Employers and trustees should consider whether to make this change, which can be made until 6 April 2017 if the statutory amendment power is used; the amendment can have retrospective effect to 6 April 2016.  It may be that the statutory power has to be used if making the amendment under a scheme’s amendment power would have the potential to reduce accrued benefits or otherwise fall foul of that power.

GMP reconciliation service

A last warning to register for HMRC’s GMP reconciliation service – if an application for registration is not submitted in time, it will not be possible to challenge the GMP records held by HMRC if those records differ from those held by a scheme.

Consequential rule amendments

Employers and trustees should consider whether their scheme contains any other provisions which may require amendment as a result of the cessation of contracting-out.

For example, are there connections in the rules to the state pension, eg the provision of bridging pensions?  Is there an offset by reference to the basic state pension? How are the provisions worded?  Consideration should be given to this point as soon as possible as it is likely that amendments can only be made in respect of future accrual.

Where next for contracted-out benefits?

Benefits accrued on a contracted-out salary related basis will remain subject to special treatment, unlike those accrued on a contracted-out money purchase basis, where restrictions largely fell away in 2012.  Our aim in drafting these blog posts has been to raise awareness of the many considerations required in advance of the 6 April deadline.  Some considerations will remain beyond that date; if you would like to discuss your obligations in further detail, please speak to your usual contact in the Gateley Plc Pensions team.

Returning to the thoughts of Mrs Joyner-Kersee: “Once I leave this earth, I know I’ve done something that will continue to help others”.  We’re not planning on going anywhere just yet and we’re not sure how many people would recognise contracting-out as a subject matter worthy of passing to the next generation, but we hope our blog posts on the cessation of contracting-out have prompted action and helped you to avoid regret.

This post was edited by Jill Walters. For more information, email blogs@gateleyplc.com.


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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.