23rd Jul 2018

Is there a pension storm on the way?

Pensioners who are in receipt of an income from a defined benefit pension scheme could find that they have been overpaid by their occupational scheme, and also related to this that their state pension income is cut as HMRC carries out a clean-up of its older pension records.

The problem has occurred as a result of people contracting out of SERPs (the ‘State Earnings Related Pension Scheme’, also known from 2002 as the ‘State Second Pension’) from 1978 onwards. Schemes and people were actively encouraged to contract out of this state pension to put their money towards a company or private pension.  The carrot for both employers and employees was that they could pay lower National Insurance contributions.

Schemes had to commit to matching the additional state pension their employee would have received had they remained contracted in – the Guaranteed Minimum Pension (GMP). In 1988, the government extended this option to include both defined contribution and personal pensions and eventually in 2016 (2012 for defined contribution/personal pensions) the contracting out of paying full national insurance contributions was scrapped.

It is a complicated state of affairs – not wholly unusual in the world of pensions – which is why last year HMRC decided to launch a two-year reconciliation service – in other words to ensure that employment histories and employees’ pension savings actually matched.  The problem is that records go back 40 years and so inevitably some schemes are likely to find they have overpaid/underpaid GMP pensions to thousands of their scheme members – in which case, pensioners could also see a change in their state pension entitlement.

The reconciliation won’t be completed until December 2018 but some believe tens of thousands could be affected.  Although some members won’t be asked to pay back overpayments (the Civil Service Pension Scheme had overpaid its members by £22m, but these were written off) our view is that many schemes will be reclaiming material overpayments and also making underpayments to members.

Sadly, some pensioners could also see their state pension reduced going forward. However the former Pensions Minister, Sir Steve Webb, has suggested that any changes will be modest and only extreme cases will see major changes to their pension.

For now, people are going to have to wait until they are contacted by HMRC or their company pension scheme later this year or early next.   Time will tell whether or not there is a pension storm on the way.