Key points

  • The Scheme Reconciliation Service, which reconciles HMRC records on GMPs and membership data with those of schemes, will terminate in December 2018.  HMRC has stated that new queries will not be accepted beyond October 2018.   
  • Schemes still to reconcile their GMPs must send an expression of interest form to HMRC by 5 April 2016, or they will not be able to reconcile their records against HMRC data.  The expression of interest form is available at   
  • GMP reconciliation typically takes a considerable amount of time to complete, so schemes should approach HMRC sooner rather than later in order to do so.   
  • Schemes still open to accrual on a contracted-out basis can be amended by the employer in order to mitigate the cost that will arise due to increased employer NI contributions.


A single tier state pension is being introduced for individuals reaching their state pension age after 5 April 2016, and the State Second Pension (S2P) element of state pensions is accordingly being phased out. As referred to in our previous publications this means the end of contracting-out – the practice of employers contracting their employees out of S2P (and previously SERPS), in return for lower National Insurance Contributions (NICs), on the basis that they provide sufficient pension rights in the company pension scheme. Contracting-out will now end completely from 6 April 2016, having already terminated for money purchase schemes on 6 April 20121 .

Open schemes

For schemes that are still open to accrual on a contracted-out basis, the impact of the termination of contracting-out is likely to be significant.  From 6 April 2016, participating employers and scheme members will have to start paying the standard rate of NICs, rather than benefiting from the previous NIC rebate. This rebate is significant, being 3.4% of employer NICs and 1.4% of employee NICs. A Government impact assessment2 estimated that the employer's element of the rebate equates to approximately 5-6% of the funds flowing into a funded DB scheme each year, £2.5bn p.a. in aggregate.

The Government was concerned that, for DB schemes that are currently contracted-out, this increase in the cost of funding the continued accrual of DB benefits would result in an acceleration of scheme closures, and so it has introduced a mechanism for employers to mitigate this effect. This is by way of an overriding statutory power3 for employers to either increase employee contributions in respect of future accrual, or to reduce the rate of future accrual. In both cases, the change can only be made to the extent necessary to compensate the employer for the increase in employer NICs, as calculated by an actuary appointed by the employer (or the principal employer, in a multi-employer scheme). The relevant calculations are likely to require information from the trustees, and there is an obligation placed on scheme trustees to comply with reasonable requests for information in this regard.

The statutory override power to amend does not apply in respect of public sector schemes or any "protected person" whose employment moved to the private sector from former nationalised industries and who were members of the relevant public sector pension schemes.

Impact on rights already accrued

Reconciling data with HMRC

The cessation of contracting-out will have impacts beyond the termination of the NIC rebate. Schemes contracted out on a salary related basis have been required to meet certain standards to compensate for the element of the state pension that was given up. In particular, for scheme members who were contracted out prior to 6 April 1997, Guaranteed Minimum Pensions (GMPs) must be provided as a minimum entitlement. The calculation of GMPs is complex, as they are intended to provide a pension at least equivalent to what the member would have received from the State under SERPS without contracting out, including the benefits to spouses and dependants.  

Ensuring that the correct GMP is payable involves the pension administrator liaising with the National Insurance Contributions Office (NICO) of HMRC, in order to make sure that the GMP data held under the scheme matches that held on NICO's records. This process is known as "GMP reconciliation". In the past, GMP reconciliation checks would be carried out on the retirement of a member or when a scheme ceased to contract out, was wound-up or was assessed for entry into the PPF.  Often, the scheme's records and those of NICO do not match and scheme administrators can challenge the figures where they believe they are the result of inaccurate information held by HMRC. However, after December 2018, HMRC will assume that its own figures are correct, and will write to all members with contracted out benefits to tell them what their GMP entitlement is, and which scheme is responsible for paying it. It is therefore very important that schemes complete the GMP reconciliation process before December 2018.

HMRC has introduced a Scheme Reconciliation Service, to assist schemes with completing the GMP reconciliation process in advance of the December 2018 deadline. Schemes wishing to use this service must send an expression of interest form to HMRC before 5 April 2016, or they will not be able to use the Scheme Reconciliation Service to reconcile their records against HMRC data. The expression of interest form is available at Following 5 April 2016, schemes wishing to obtain GMP data from HMRC regarding their members will only have access to a self-service portal. Note that reconciliation typically takes a considerable amount of time to complete, so schemes should approach HMRC promptly as it seems likely that demand for the service will exceed capacity.

HMRC is publishing a Countdown Bulletin4, providing further information on the services that it will provide up to December 2018, and the steps that schemes will need to take in advance of that.

Contracted out rights going forwards

Regulations made under the Pensions Act 2014 set out details of how accrued contracted out rights will be treated going forwards5. Accrued GMPs under contracted out pension schemes will continue to be protected by statutory requirements. (Since 6 April 2009, there has been a mechanism available6 for schemes to convert their GMPs into ordinary scheme benefits subject to certain restrictions, but this has not been widely used.) Protections will also apply in respect of benefits that were accrued subject to the "reference scheme test" (which applied for benefits accrued after 5 April 1997 under schemes contracted out on a salary related basis), in particular requiring a spouse's or civil partner's pension that is at least as generous as it would have been if the reference scheme test still applied.