Following the abolition of contracting-out for defined benefit pension schemes, schemes are at risk of having to provide an underpin for members who ceased contracted-out employment on 6 April 2016 but continue in pensionable service, in relation to how they revalue guaranteed minimum pensions.

Following the abolition of contracting-out for defined benefit pension schemes, schemes are at risk of having to provide an underpin for members who ceased contracted-out employment on 6 April 2016 but continue in pensionable service, in relation to how they revalue guaranteed minimum pensions (GMPs).

Many scheme rules reflect old statutory rules which allow schemes to use fixed revaluation to revalue GMPs once members leave contracted-out service (which all active members will have done on 6 April 2016). However, from 6 April 2016, the requirements for early leavers changed, so that fixed revaluation could only be used once members with GMPs leave pensionable service.

Employers could therefore be “on the hook” to provide the better of fixed rate revaluation and the statutory requirements which apply to active members with GMPs (i.e. section 148 revaluation1), which could increase scheme liabilities.

Ordinarily there would be a risk that changing scheme rules to correct this problem could breach statutory protections for accrued benefits.

However, the Government introduced regulations to enable trustees to address this issue without breaching statutory restrictions. Under these rules, trustees can pass a resolution by 5 April 2017, which amends the scheme rules to confirm the circumstances in which fixed revaluation can be used to revalue GMPs after 6 April 2016 (i.e. with retrospective effect).

By 5 April 2017, trustees and employees need to:

  • confirm whether they need to amend their pension scheme to remove the underpin, and
  • if an amendment is needed, pass a trustee resolution to amend the scheme rules to confirm when fixed rate revaluation can be used.

We can review the governing documents of your scheme to advise whether this issue affects you and prepare any resolution you might need to resolve this problem.