GMP, COD and Single Tier Pension

SeekTruth

Since the announcement of the Single Tier State Pension I have been trying to understand what it all means, particularly with regard to my own situation.
In the process I seem to have learned a lot, but may still have major misunderstandings. Could someone with a better grasp of the subject than me please answer my questions.
My understanding of GMP and COD: Guaranteed Minimum Pension (GMP) and Contracted Out Deduction (COD) both accrued during contracted out service between April 1978 and April 1997. At the time of accrual they were both equal to the SERPS earned. Since accrual and during active membership of the contracted out scheme they were both revalued in line with average earnings (strictly, in accordance with Section 148 Orders). During any period of deferment they were both revalued by the same mechanism (whichever of the 3 permissible mechanisms was chosen by the pension scheme). After pension age (which for this purpose, I think, is still 60 for females and 65 for males and so does not necessarily match State Pension Age) both GMP and COD increase by the same amount (zero for pre-88 element and CPI (formerly RPI) capped at 3% for post-88 element).
Question 1: Is this understanding of GMP and COD correct? (One implication being that GMP and COD are numerically equal.)
My understanding of transition to Single Tier: For those reaching State Pension Age (SPA) after the introduction of the Single Tier Pension a Foundation Amount is calculated (becoming their starting value in the new scheme). The Foundation Amount is the greater of two amounts, one based on the current scheme and one based on the new scheme. Loosely speaking both calculations take the then entitlement to Basic/Single Tier Pension, add the Additional Pension and subtract COD (and for Single Tier also subtract a correction for contracted out service post-April 1997). Both calculations are performed as at the Single Tier introduction date and so are a snapshot at that date. If all components in the calculation were revalued every year by the identical percentage then the date the snapshot is taken would have no effect. However, some components are revalued by the ‘triple lock’, others by CPI or average earnings and the COD by somewhere between zero and CPI capped at 3%. GMP and COD were originally introduced (in 1978) as a simple (?) mechanism to enable the contracted out scheme to not be responsible for full inflation linking of a portion of the pension, the State being responsible for some/all of the inflation linking.
Question 2: For those reaching SPA after the introduction of Single Tier am I correct in thinking that the State is no longer taking responsibility for inflation linking some/all of the GMP element of the pension.
Apologies for the length of this post.

xylophone

https://docs.google.com/viewer?a=v&q=cache:xieeu_oN5m0J:www.parliament.uk/briefing-papers/SN02674.pdf+&hl=en&gl=uk&pid=bl&srcid=ADGEESjrI-Ob8kII6GoGLbz2ga6o2NRlHlfg2hXcCHxNaxugYmodB_13V6jda-pCzpNajx-IDv9nSa_hiHDGxnVeZuiNPhs7MwXQdo3_UuVzTHdJcUrnk7_PbJmUFgMHtCPVB49q_tQs&sig=AHIEtbQmF_fUlMTPFILd2gTN8hmdpuKzrw

See also http://www.yourpension.org.uk/Files/Files/In%20The%20Scheme/5.%20GMPGuide240211.pdf -typical of public service contracted out schemes.

http://www.dwp.gov.uk/docs/single-tier-pension.pdf
See under "affordability and assumptions" for increases.

As far as I can see, the contracted out will start with their foundation amount calculated as described - if they are still paying NI they will build up an entitlement up to the full single tier pension as described. They will then receive whatever their NI record entitles them to at retirement and this will increase by the triple lock.

What is less clear to me is how the pensions of those with a foundation amount more than the single tier state pension will increase.

Will the whole of their pension increase using triple lock? Or will the single tier element increase while the amount by which it is exceeded stay flat, so that the value withers with inflation?

So Jenny (in the example) receives say £144 + £3 in Year 1, say £147.60+
£3 in year 2, £151.29 + £3.00 in year 3 and so on?

SeekTruth

Xylophone, thanks for those 3 excellent references. The first 2 apply solely to the current scheme but do explain the current procedure. The 2nd reference in particular has examples that, I think, agree with my understanding of the current mechanism by which the DWP pay some or all of the Pensions Increases on the GMP in with the State Pension.
The 3rd reference describes the Single Tier Pension and the transition arrangements, but does not (as far as I can see) explain what will happen to Pension Increases on the GMP for those reaching State Pension Age after the Single Tier introduction (please state the paragraph numbers if you think it does explain this). However, it does answer your question regarding revaluation and uprating of the Protected Payment - Jenny's £3 per week in the example you quote. This will be revalued before SPA and uprated after SPA in line with prices (see para 100) - so not as good as 'triple lock' but considerably better than flat.
Reference 1 dates from March 2010 and has an interesting section (see 2.2) on simplification of CODs - proposing converting the current COD (that increases after SPA at various rates between 0% and CPI capped at 3%) into an actuarially equivalent amount that increases at precisely the same rate as the Additional Pension. Does anyone know what the current status is of this proposal (I haven't seen it mentioned anywhere else)? This proposal would seem to fit well with the intent of having a much simpler system for those reaching SPA after the introduction of Single Tier.

Can I add a further reference to this discussion, namely a DWP Technical Note on single tier transition (sorry, I don't appear to be allowed to include links in my post). This seems to suggest that there is no current intent to simplify CODs by actuarial equivalence. My, pessimistic, reading is that there is no intent to recognise the expectation that the State would be responsible for some/all of the increases to GMP built-up in a contracted out pension scheme. I hope someone will prove me wrong!

xylophone

the current status is of this proposal

I haven't found any other reference to this proposal.
Thank you for your comments on Jenny's situation - of course this is very much akin to what happens now with increases on BSP and ASP - BSP by triple lock, ASP by CPI.

With regard to the GMP question, I assume that this is the technical note http://www.dwp.gov.uk/docs/single-tier-pension-transition-technical-note.pdf

As far as I can see, when Mr Clark becomes a state pensioner, he will receive his occupational pension according to scheme rules but the increases to pre 88 GMP and the "excess of 3% post 88 GMP" will be regarded as satisfied by the triple lock increase on his "Foundation Amount"?

hatpress

I've also been trying to find an answer to Question 2. I contacted my MP and they have now got a reply from Steve Webb (Pensions Minister). It looks like the State will no longer provide any index linking for GMPs.

In his letter, he says:

The relationship between the additional State Pension and the Guaranteed Minimum Pension (GMP) will end when the new State Pension is introduced. Schemes will continue to index GMPs as they always have (0% pre-88, up to 3% post-88). Inflation proofing will be applied to the new State Pension but there will be no comparison made with any GMP.

As this comparison was the means of providing most of the inflation protection to GMPs, it looks like we will be losing quite a bit of pension income in the longer term.

SnowMan

To cover some of the points above it is worth considering the differences between someone (with otherwise an identical history) who reaches SPA on the day before the implementation of the new state scheme and the day after the implemenation of the new scheme.

The + points and - points below relate to the advantages and disadvantages respectively of reaching SPA the day after the new scheme is introduced.


+ those where the foundation amount is based on the new scheme basis rather than the existing state pension accrual will see an uplift to their state pension under single tier. This category will include people who have been self-employed throughout their working life. Note for the majority of people the foundation amount will be based on existing state pension accrual in which case there is no uplift.

+ Under single tier the first £144pw of the foundation amount increases in payment with the triple lock guarantee. The remainder above £144pw increases in line with CPI only (see the white paper). If somebody has accrued additional state pension then much or all of that additional pension will under single tier be increased in line with the triple lock guarantee. Under the existing state scheme that additional state pension would only have been increased in line with CPI. The 'much or all' caveat is required, as to the extent that the additional pension takes the foundation amount above £144pw this extra indexation under single tier does not apply.

- Those coming under single tier with past periods of contracting-out could potentially lose indexation in payment of their pre 88 GMP (COD) and any indexation in payment above 3% of their post 88 GMP (COD); that indexation would under the existing state pension scheme have been provided by the state after SPA, but under single tier that indexation is lost. But this isn't always the case, see the note below.


Note: In many cases people who have contracted-out of SERPS will have a negative additional state pension pre 1997. This can happen as although the COD and SERPS are often similar in starting amount the COD often increases in deferment at a faster rate than the SERPS foregone, and the additional state pension is calculated as the SERPS foregone less the COD. Basic state pension isn't reduced because of that negative additional pension. However in determing whether the state will pay for the indexation of pre 88 GMPS (and partial indexation of post 88 GMPs) under the current scheme, account will be taken of the negative additional state pension and so indexation either won't be paid or won't be paid until some time after SPA. In that case there may be no loss or limited loss through this specific effect in falling under single tier.

SeekTruth wrote: »

Reference 1 dates from March 2010 and has an interesting section (see 2.2) on simplification of CODs - proposing converting the current COD (that increases after SPA at various rates between 0% and CPI capped at 3%) into an actuarially equivalent amount that increases at precisely the same rate as the Additional Pension. Does anyone know what the current status is of this proposal

It looks like this has been abandoned as a result of the single tier proposals which takes a much more broad brush 'ignore the affect of different increases in deferment and payment' approach.

SeekTruth

SnowMan wrote: »

To cover some of the points above it is worth considering the differences between someone (with otherwise an identical history) who reaches SPA on the day before the implementation of the new state scheme and the day after the implemenation of the new scheme.

The + points and - points below relate to the advantages and disadvantages respectively of reaching SPA the day after the new scheme is introduced. ...

Thanks for the summary. To increase the comprehensiveness of your assessment can I suggest adding 2 more - points, covering deferment and inheritance. Deferment: the suggestion that the increase for deferment will reduce from approx 10% pa to maybe 5% pa. Inheritance: under the new scheme the only part that a surviving spouse will inherit is linked to the Protected Payment, if any.

Billopp

I realise I am late to this thread and would like to advise that I have been in contact with Steve Webb and the DWP since early last year who have both confirmed that there will not be any GMP increases after the Single-Tier pension starts. One of the reasons given was that it would no longer be possible to compare the GMP wit notional state second pension/SERPS. They also both say that the DWP has never been responsible for paying GMP increases. The reason given was that they work it out on notional state second pension and deduct what the GMP is with cost of living increases paid by occupational pension. They are just playing with words.

For some reason they think that by using a notional state second pension thay are not paying any of the GMP increase. If you look at the booklets for contracted out schemes you will see that they all show that DWP are responsible for paying part or all of GMP increase. The best booklets at explaining it available on the internet are public service schemes. Even the Civil Service instructions issued by the Cabinet Office state the DWP are responsible as well as HMRC, House of Commons Library and Pensions Advisory Service.

When I reached state pension age in 2005 I asked for a calculation about how the calculate increases are worked out and received a very good reply from HMRC explaining how it was worked out which also said that DWP was responsible for paying all or part of GMP increases.

There is a interesting letter in the Independent Newspaper for Saturday 11 Jan 2014 by Neasa MacErlean in the money section that I was involved in. The article states that a man can loose up to about £17,000 and a woman £23,000.

I just don't think the Government thought it out when they wanted to introduce Single-Pension.

Do you all realise that there are special arrangements between HMRC/DWP to advise public service schemes that they are not paying a GMP increase and that they the occupational pension have to take over payment of GMP increases normally paid by DWP.

SnowMan

I just don't think the Government thought it out when they wanted to introduce Single-Pension.

The removal of the GMP increase is an inevitable and understandable part of the simplification; if you get rid of GMPs how can you pay increases on something that is based on something that no longer exists without creating complication. So their explanation makes sense. That is a 'practical consideration' view not a 'fairness' view. And it is a complicated enough issue that most people won't realise what is happening. That said it will have an affect on some people's state pensions as mentioned earlier in the thread. The independent covered it subsequently in this story

http://www.independent.co.uk/money/pensions/losers-who-never-knewin-the-switch-to-singletierpensions-9052425.html

Do you all realise that there are special arrangements between HMRC/DWP to advise public service schemes that they are not paying a GMP increase and that they the occupational pension have to take over payment of GMP increases normally paid by DWP.

I certainly wasn't aware of that. Can you give some more detail? So is that saying that public sector schemes will pay the increases on GMPs 'lost' because of the state pension simplification?

Where people have been both in public sector schemes and a private sector contracted-out final salary scheme (using fixed rate revaluation) during their working lifetime, then there might be no state GMP increase under the existing state scheme. And yet it sounds like those people would get an extra increase from their public sector scheme under this arrangement that they wouldn't have got otherwise. So it just an increase in public sector scheme benefits in those cases funded by the taxpayer.

xylophone

They also both say that the DWP has never been responsible for paying GMP increases. The reason given was that they work it out on notional state second pension and deduct what the GMP is with cost of living increases paid by occupational pension. They are just playing with words.

From a Note for Record in the House of Commons Library (By Djuna Thurley 10 Feb 2012)

"Responsibility for indexing GMPs is split between the state and the occupational pension scheme:
-
The pension scheme has to provide indexation on rights accrued between 1988 and 1997, in line with prices, subject to a 3% cap.
-
The state is responsible for indexing rights accrued between 1978 and 1998, and for any inflationary increases in excess of 3% in respect of rights accrued between 1988 and 1997.

The state provides the increases for which it is responsible through the additional State Pension (ASP).
The increase required by schemes each year is provided for in a draft Statutory Instrument, the Guaranteed Minimum Pension Increase Order 2011. It is generally scheduled for debate at the same time as the draft Social Security Benefits (Uprating) Order. The debate tends to be dominated by the latter. The GMP Order is seen as more of a technical measure, to require schemes to provide their share of the increase"

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/209092/foi-1816-2013.pdf

"2) The Department for Work and Pensions (DWP) is not responsible for
paying increases on contracted-out scheme pensions. Legally DWP
has no power to pay any part of occupational pension scheme benefits.
However, DWP does pay increases on the Additional State Pension to
take account of inflation, rather than in any way providing for additional
increases to the member's Guaranteed Minimum Pension (GMP).
When the new State Pension is introduced, the relationship between
the Additional State Pension and the GMP will end. Pension schemes
will continue to index GMPs as they always have been (0% for 1978 -
1987 accruals and by inflation, capped at 3%, for post 1988 accruals).
Inflation proofing will be applied to the new state pension but there will
be no comparison made with any individual's GMP."

http://www.puntersouthall.com/Insights%20and%20views/Insight%20Attachments/State%20pension%20reform%20and%20occupational%20pension%20schemes%20July%202013.pdf

"Employers participating in public sector schemes will not be able to pass on the increased
cost of NI contributions by reducing benefits or increasing members’ contributions as the
Government has only recently promised to make no further changes to public service
pensions for the next 25 years (following changes that are currently in progress)."

The above may mean that as well as not being able to increase employee contributions, the Public Service Schemes will have to take over GMP inflation linking for pre 1988 and greater than 3% post 88?

SnowMan

xylophone wrote: »

The above may mean that as well as not being able to increase employee NI, the Public Service Schemes will have to take over GMP inflation linking for pre 1988 and greater than 3% post 88?

That's what Billopp seems to be saying.

Of course public sector employees who have been contracted-out also and are below SPA at 2016 get a chance to effectively accrue extra state pension to bring their foundation amount up to the full single tier pension amount as well.

I should have said in my earlier post that while I think the non-payment of increases on GMP by the state is an inevitable and understandable aspect of the simplification, Billopp is right to say that the DWP historically have always paid inflationary increases on pre 88 GMP in the past and on the excess of inflation above 3% on post 88 GMP (at least in straightfoward scenarios where revaluation in deferment of GMP and additional state pension are the same). The contracting-out terms were set on that basis. And the DWP can't use words to pretend otherwise.

Or put another way I agree with the DWP explanation that

One of the reasons given was that it would no longer be possible to compare the GMP wit notional state second pension/SERPS

but I don't agree with the DWP explanation

They also both say that the DWP has never been responsible for paying GMP increases.