What does the end of contracting out mean for pension schemes?

Topic:

Hot topic

Date published:

Monday, 20 July 2015

Author:

Gillian Graham

Contracting-out for open defined benefit (DB) schemes ends in April next year. Some of the scheme sponsors we work with have already started the process of managing this change - which is a good thing given how much there is to do!

There are complications and considerations for both employers and trustees. Will you make changes to the scheme benefits and/or contribution levels? If so, can you use the statutory override? This will take time to decide and advice will be needed. Add to this the need to consult on and communicate any changes with affected members, it is easy to see how time could run out on those who don’t start their preparations now. (Take a look at our contracting out changes briefing note for more information, as well as a handy checklist of actions for employers.)

As well as needing to implement any changes the employer wishes to make to the DB scheme, the biggest issue for pension trustees is likely to be the need to reconcile contracting-out data with HMRC. When it comes to Guaranteed Minimum Pensions (GMPs), there are nearly always big differences in the data held by HMRC and that held by the scheme. I think it is wise to start the reconciliation process now and avoid getting caught up in the pressured rush that’s bound to happen in the run up to the deadline in 2018 when checking records with HMRC will no longer be an option. (See GMPs: to reconcile or not to reconcile? That is the question for more details.)

There’s been much comment in the pensions press about whether the end of contracting out will be the end of open DB schemes. Given it will lead to employers reviewing scheme benefit and contributions levels, this world of falling gilt yields and ever-increasing deficits may, in reality, make closure a likely consideration for many employers. On a more positive note, I’m hoping this will lead to more generous defined contribution (DC) schemes and more equity in benefit packages across all employees.

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