ASP and GMP/COD

Legacy_user

Sorry if this has been thrashed to death before, but couldn't find it. I've just reached 65, and got the Pension Service to send me details of HMRC's calculation of my Additional State Pension (which is all pre-1997 SERPS) and my Contracted-Out Deduction, which is also, very confusingly to me, referred to as a Guaranteed Minimum Pension. Can any of the wise persons who post here give me a pointer as to why my ASP is (slightly) more than my COD? The two calculations seem to use (slightly) different total uprated earnings, and different accrual factors (20% and 20.5%) in part of the calculation.

Do I understand correctly that the ASP is the theoretical ASP I would have earned if I had not been contracted out, and the COD is an (in my fortunate case, highly pessimistic) estimate of the occupational pension I'm actually getting?

MikeJones_2

Hi YoungNick,

YoungNick wrote: »

Do I understand correctly that the ASP is the theoretical ASP I would have earned if I had not been contracted out, and the COD is an (in my fortunate case, highly pessimistic) estimate of the occupational pension I'm actually getting?

Yes, you're on the right lines with your assumptions (although it's an estimate of the contracted-out element of your occupational pension - which might be different from the total amount of it). This page explains COD and GMP and might also help you understand future pension increases:

- Increases (The Occupational Pensioners' Alliance)

Hope it makes sense; if not post back.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

System

Many thanks for the link to the article on increases. However, there is one statement in the linked article which is definitely wrong, at least in my case. It says:

Contracted Out Deductions are not a decrease in your State pension but the GMP paid with your occupational pension.

I've also just had my letter about the April 2009 increase. It shows that the ASP is being increased by the full 5%. The two parts of the COD are increased by 0% and 3%. (I can work this out, because I've asked for the split. But the letter just gives one figure for the COD, and the calculation must be totally inpenetrable to the average pensioner.)

The COD (as its name implies!) definitely is a real and visible deduction in the way the Pension Service present the calculation. The net effect, of course, is that, because the COD is increased by less than the 5% inflation rate, my total state pensions increase by more than 5%. (And yes, the April 2009 increase in my occupation pension is less than 5%, by an amount that exactly cancels out the 'windfall' increase in my state pensions.)

Please could you also give a link to anything that explains why the original calculation, at age 65, of the (theoretical) ASP and the real COD (alias, in a way that still baffles me, GMP), use marginally different cumulative inflation-adjusted earnings, and marginally different accrual factors?

System

MikeJones wrote: »

Yes, you're on the right lines with your assumptions (although it's an estimate of the contracted-out element of your occupational pension - which might be different from the total amount of it.

Thanks. I almost understand that, I think. But is it really an estimate, as I wrote, I now think mistakenly? It seems to me, now that I've read the article you linked to, to be a more like a definitive statement, worked out by specific (but to me, mysterious) rules, of the amount the state will assume I'm getting from my occupational pension, which bears no visible relation at all to what I am actually getting. For example, the 'GMP' is based on cumulative earnings in long-past years, while my occupational pension is a final salary scheme. In an (admittedly very unlikely) case when I got hugely demoted at age 63, as far as I can see my actual occupational pension could have been less than what the state calls my 'guaranteed' minimum pension.

MikeJones_2

Hi YoungNick,

YoungNick wrote: »

Please could you also give a link to anything that explains why the original calculation, at age 65, of the (theoretical) ASP and the real COD (alias, in a way that still baffles me, GMP), use marginally different cumulative inflation-adjusted earnings, and marginally different accrual factors?

I'm struggling to find anything that I can point you to on this, I'm afraid.

YoungNick wrote: »

But is it really an estimate, as I wrote, I now think mistakenly? It seems to me, now that I've read the article you linked to, to be a more like a definitive statement...

That's how I understand it too.

YoungNick wrote: »

For example, the 'GMP' is based on cumulative earnings in long-past years, while my occupational pension is a final salary scheme...

Your Guaranteed Minimum Pension is the contracted-out element of your final salary scheme earned between 6th April 1978 and 5th April 1997. It replaced what would have been your SERPS pension (the additional state pension over and above your Basic State Pension).

SERPS/GMP accrual was based upon your pensionable salary between a Lower Earnings Limit (LEL) and an Upper Earnings Limit (UEL).

At State Pension Age your final salary pension scheme is legally obliged to provide an annual pension increase on any GMP you earned from 6th April 1988 to 5th April 1997 (called Post '88 GMP) - by matching inflation up to 3% p.a. If inflation is above 3% in any one year - then there is no obligation for the pension scheme to match that increase above that rate unless the Scheme Rules provide for that scenario.

There is no obligation for your scheme to provide any pension increase after SPA for any Pre April '88 GMP.

At State Pension Age your Basic State Pension (not your GMP) will be topped up by the DWP which will add any inflation increase due by Statutory Orders (sorry to be techie here). If therefore inflation was 5%, DWP would add to you Basic State Pension:

(a) the equivalent of a 5% increase in respect of your Pre April '88 GMP and
(b) the equivalent of 2% increase in respect of any Post April '88 GMP (the difference between the mandatory 3% your scheme has to provide and the actual rate of inflation, where greater).

YoungNick wrote: »

In an (admittedly very unlikely) case when I got hugely demoted at age 63, as far as I can see my actual occupational pension could have been less than what the state calls my 'guaranteed' minimum pension.?

No, for the following reason:

At State Pension Age a contracted-out defined benefit scheme (i.e. such as your final salary scheme from what you have described) has a legal obligation to provide you with NO LESS than your Guaranteed Minimum Pension. (If you drew benefits before SPA, the pension could be lower than your GMP but at SPA the scheme would be required to 'step-up' the pension to the GMP equivalent).

You should also note that most defined benefit schemes use a final pensionable salary figure (or some similar term) to determine the pension benefits at retirement. This can be whatever the Scheme Rules determine them to be - but common descriptions would include 'an average of the last 3 years pensionable salary', 'an average of the last 5 years pensionable salary', 'the best consecutive 3 year's pensionable salary in any of the last 10 years'.

Hope this all helps?

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.