Up to a million pensioners could be stuck with incorrect payments due to a disagreement between pension schemes and HM Revenue & Customs (HMRC) on data records for contracting out.
The estimate was made by consultancy Willis Towers Watson, as the deadline for guaranteed minimum pension (GMP) benefit reconciliation looms and some disputes with HMRC have stalemated.
Contracting out means defined benefit (DB) schemes could opt out of the state earnings-related pension scheme (Serps), so that individual members would not be tripling up on pension benefits by building up a basic state pension, Serps, and an earnings-related occupational pension.
Between 1978 and 1997, provided the scheme offered a pension of a guaranteed minimum level (GMP), the employer and employee would be allowed to pay a reduced rate of national insurance (NI) contributions and the worker would no longer build up rights under Serps.
Back in 2016, HMRC discovered some pensioners had been paid contributions to their NI when in fact they were contracted out.
This means some pensioners were overpaid each month while, conversely, calculation errors for other individuals meant they were underpaid.
Since the anomalies were uncovered, HMRC has been issuing a number of countdown bulletins to schemes to provide guidance on how to rectify the problem.
Schemes have been given until the end of October to submit queries, and HMRC has undertaken to respond to all queries raised by 31 March 2019.
FTAdviser reported in March that thousands of DB scheme members faced demands for pension cash back as a result of this reconciliation process.
The Pensions Administration Standards Association (Pasa), launched new guidance on this issue last week, focusing on cases which were unable to be rectified during a reconciliation exercise and are now "stalemate".
Geraldine Brassett, chairwoman of Pasa’s GMP working group, told FTAdviser there was a "rump of cases" where schemes were not able to agree with HMRC.
She said: "It might be that the scheme thinks it holds a liability with HMRC and HMRC thinks there is no liability, or that HMRC thinks the scheme has a liability and the scheme thinks it doesn't.
"At the end of this whole reconciliation process there will be some member cases where it can't be reconciled."
Ms Brassett explained the differences in records were probably due to past record keeping issues.
She said: "A GMP might differ because someone had a backdated salary increase, or pay review, and contracted out contributions were deducted from that, and the employer told HMRC but not the scheme administrator.
"We might have a member which we think has transferred out of their scheme, which means the liability has moved, but nobody told HMRC, so they will think the liability sits with the existing scheme, which is not the case."
If the schemes can’t prove to HMRC that their records aren’t correct, the taxman won’t accept the pension fund’s figures, she said.
