Why is my Guaranteed Minimum Pension not rising in line with inflation?
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle. This week, he answers a reader who had Guaranteed Minimum Pension rights under an old employer scheme.
A state pension overhaul in 2016 affected people owed GMP, and Steve explains how the system worked before that and how the rules have changed.
If you had GMP rights under an old pension scheme, but have reached or will hit state pension age after April 2016, this will tell you where you stand.
Retirement money: Why is my Guaranteed Minimum Pension not rising in line with inflation? (Stock image)
I am a 65-year-old woman who has just become eligible for my state pension in September of this year.
I have a small company pension (£4,400 per year) which is almost entirely made up of Pre 1988 GMP.
This became payable when I reached 60 but has not been increased since as I was informed that the annual increases would be paid through my state pension.
Now that I have reached the new pension age I have asked the Government’s Pension Service to confirm that I will now start to get the increases on my GMP through my state pension, but I am getting conflicting information.
Could you please explain the situation regarding this. When I have looked online the indication seems to be that these increases may not be payable for those retiring after 2016.
My pension entitlement has been reduced due to my being contracted out by my company pension scheme. The GMP paid by them now is to cover this reduction, but if no increases are made to this I will be significantly worse off over the coming years.
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I would very much appreciate your advice on how I can solve this issue, as it seems to me that I have ‘lost out’ not only in the delay of my pension payments by five and half years, but now also in the static value of my GMP payments going forward as I have been pushed into the post 2016 rules.
Could some transitional arrangements be in force to cover this situation?
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Steve Webb replies: The short answer to your question is that some people who reached pension age after 2016 will indeed have lost out on annual increases that they were expecting but that those who worked in the public sector may find that they are protected, at least for those retiring up to April 2021.
What is GMP and ‘contracting out’?
To understand what has changed, it is worth explaining how the system used to work.
In simple terms, the old state pension system had two parts – a basic state pension which applied to most people, and an earnings-related state pension (SERPS) which covered those in a workplace pension unless their scheme had ‘contracted out’ of this system.
For those in a contracted out workplace pension (such as yours), the pension scheme promised to pay a pension at least as good as the state pension you had given up.
This was known as a ‘Guaranteed Minimum Pension’ or GMP, and it ran from 1978 until 1997, when it was discontinued by the Government.
For the years beyond 1988 there was a requirement for the GMP in payment to be increased in line with inflation (subject to certain limits) but for the period before 1988 (which is when you were in the scheme) it did not have to increase.
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At retirement, for the years up to 1997 the government would work out your ‘gross’ state pension (basic pension plus SERPS) as if you had not been in a company pension, and then they would deduct the GMP that your scheme had promised to pay.
One consequence of this is that it didn’t much matter if your GMP was going up each year. This is because the gross state pension would go up each year (at least in line with inflation) and if your GMP had been frozen, the state pension would rise to make up the difference.
What happens if you retire after April 2016?
What changed in 2016 is that the state pension is no longer in two parts – basic pension plus SERPS – but is a single flat rate.
This means that once they have worked out your state pension up to 2016 there is no further process of deducting your GMP each year. In effect, this means that there is no mechanism for compensating you each year for the lack of indexation of your GMP.
A large group of people who are affected by this are those who worked in the public sector, as pretty much all public sector pensions operated on a ‘contracted out’ basis.
The Government estimated that around two million public sector workers who retired after 2016 could be affected by this issue and decided, as a temporary fix, to pay them GMP indexation via their occupational schemes.
This ‘temporary’ provision is due to run out for those reaching state pension age after April 2021, though it may be replaced by something else of similar value.
But there is no obligation on private sector schemes to do the same (unless their individual scheme rules require them to match whatever public sector schemes do).
Therefore, whether or not you lose out on inflation protection depends on whether your scheme was in the public or private sector. In your case, as yours was a company pension, you do.
The loss of GMP indexation (or, more precisely, the loss of compensation for the lack of GMP indexation via the state system) has been controversial and has been the subject of court action.
It will be a matter for future governments if they decide to continue to compensate public sector workers in line with current practice, but it seems unlikely that private sector schemes will be required to do the same thing.
This is because this is a liability that private sector schemes never expected to face under the terms of contracting out and they would undoubtedly challenge any legislation that required them to meet this extra cost.
If you are interested in reading more about this issue, you can see the Treasury’s response to a consultation about what to do in public sector schemes regarding GMP indexation here.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
If you have a question about state pension top-ups, Steve has written a guide which you can find here.
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