Guaranteed minimum pension

jennifernil

My husband is a miember of his employer's final salary pension scheme so was contracted out of the state earnings related scheme.
His Plan info states that it has to provide a "guaranteed minimum pension ..........in respect of Plan membership up to 5th April 1997" . and that after that date "the Plan's actuary has to certify that the Plan has passed a reference scheme test. This means that the Plan must provide benefits which at least match the benefits under a specimen reference scheme."

How can we find out what this minimum amount is?

He is entitled to take a large lump sum when he retires next year, resulting in a reduced pension if he chooses to do this. However the info also states that "to ensure your pension is not less than your Guaranteed Minimum Pension the cash commutation option may have to be restricted"

We are trying to work out whether he will be able to take the maximum lump sum or not.

His Plan are now using the new rules so agree that his notional "pension pot" will be calculated as 20 x initial pension, and that he can take 25% of that as the lump sum. They gave an illustration which did not fit with those figures, so we are wondering if this "guaranteed minimum pension" requirement has something to do with it, or if they have just made a mistake somewhere.

Debt_Free_Chick

jennifernil wrote:

My husband is a miember of his employer's final salary pension scheme so was contracted out of the state earnings related scheme.
His Plan info states that it has to provide a "guaranteed minimum pension ..........in respect of Plan membership up to 5th April 1997" . and that after that date "the Plan's actuary has to certify that the Plan has passed a reference scheme test. This means that the Plan must provide benefits which at least match the benefits under a specimen reference scheme."

How can we find out what this minimum amount is?

It's roughly equivalent to the SERPS he would have got instead.

He is entitled to take a large lump sum when he retires next year, resulting in a reduced pension if he chooses to do this. However the info also states that "to ensure your pension is not less than your Guaranteed Minimum Pension the cash commutation option may have to be restricted"

We are trying to work out whether he will be able to take the maximum lump sum or not.

His Plan are now using the new rules so agree that his notional "pension pot" will be calculated as 20 x initial pension, and that he can take 25% of that as the lump sum. They gave an illustration which did not fit with those figures, so we are wondering if this "guaranteed minimum pension" requirement has something to do with it, or if they have just made a mistake somewhere.

Take his full pension, deduct the GMP - what's left is the amount he can possibly commute. Multiply that by the scheme's cash commutation rate (ask the administrator for this) - that's the amount of cash. If this is less than 25% x the full pension x 20, then he can take that cash sum. If not, then he will be restricted to 25% x the full pension x 20.

Don't confuse the "20" with the scheme's cash commutation rate. The 20 is simply used to calculate how much cash he can have. The scheme's cash commutation rate determines how much cash they will pay for each £1 of pension he gives up.

HTH

jennifernil

Sorry if I seem a bit useless here, but how do we know what serps he would have got instead?

The commutation rate is something else we are having difficulty finding out. We did send them a straightforward set of questions about all this but only got back this illustration which does not make much sense!

Debt_Free_Chick

jennifernil wrote:

Sorry if I seem a bit useless here, but how do we know what serps he would have got instead?

Very difficult to calculate, but request a forecast of his State pension. This will show the "Additional Pension", which is his total SERPS for his whole working life and then the GMP. I'm not sure of the terminology that the DWP uses these days, so you might want to post back when you get the forecast. You can do it online

The commutation rate is something else we are having difficulty finding out. We did send them a straightforward set of questions about all this but only got back this illustration which does not make much sense!

OK. Write back and ask them to reply to your original letter. If you get no joy, contact The Pensions Advisory Service and they will help you to get the information you want - for free!

Debt_Free_Chick

jennifernil wrote:

Sorry if I seem a bit useless here

You are kidding

You're not at all useless. Having worked in the industry for 27 years, I can guarantee that it's horrendously complex. You demonstrate a remarkable understanding for someone who is merely trying to understand what they're entitled to :j

jennifernil

We will try that, thanks. Really appreciate your input!
Just to put some figures on things, OH will have 32 years service, present pensionable salary is 55628, projected company pension 33259.(from recent pension statement) Started with the company august 1975, retires august 2007.
From the illustrations they gave I have calculated the commutation rate to be either 11.01 or 11.21.
I understand the GMP is about 20- 25% of earnings between the LEL and the UEL averaged over 20 years(?), but not having these figures fo earnings I am finding it difficult to work it out.
The first illustration they sent was lump sum 200120, reduced pension 15084, then they changed it to lump sum 139065, reduced pension 20859.
We had calculated it as lump sum 166295, reduced pension maybe 18142, or slightly more. But then we had not taken this GMP into account.
Does any of this make sense to you?

jennifernil

Hi Debt_Free_Chick, still waiting for the Pension Plan/Company to reply. Do you have any comments meantime?
Off on holiday for 3 weeks on the 26th, hopefully they will have replied by the time we get back!

jennifernil

Well, we finally got a reply! It would seem that the calculation of the lump sum you can take is not at all straightforward, hence the reason we could not work it out!

Also the commutation rate for the pension earned pre 1997 is different from the post 1997 one , although they have not explained why. The scheme did change slightly at that time, contrbutions were increased from 2% to 3%, and the years needed for full pension increased from 30 to 40, so presumably this has something to do with it.

The formula, concocted by HMCR, for working out the lump sum is

20 x pension divided by ( 3 + 20/CR )

CR being the commutation rate

So you can see the only way to get this supposed 25% of pension pot lump sum is to have a commutation rate of 20. Which is not that common!

For the pre 1997 pension earned they are using a CR of only 10.57, the post 1997 one is better at 13.04. Unfortunately over 2/3 of OH's years are pre 1997, so he has not come out so well. The second answer they gave is the one they are sticking with.

So it has turned out that the GMP requirement was not a factor. He did however get a state pension forecast which turned up bad news and good news. The bad being that as he only started working in UK in 1970 he does not have enough qualifying years so will only get an 87% pension (worse that we had anticipated), the good being that he is entitled to more additional pension than we had thought.
It also seems possible that contributions he paid while working in Norway may provide some pension, but we are not at all clear whether we need to contact Norway or if the pension service here do it, or if the money will be paid direct from Norway or added on here.

Has anyone any idea what happens in such a situation?

EdInvestor

It also seems possible that contributions he paid while working in Norway may provide some pension, but we are not at all clear whether we need to contact Norway or if the pension service here do it, or if the money will be paid direct from Norway or added on here.

A friend of mine tells me that the pension service were recently very helpful in chasing up state pension entitlement accrued in Australia (she had chased up entitlement accrued in Germany by herself some years ago).So I should just confirm that they are pursuing your case with the Norwegians.