GMP, COD and Single Tier Pension

zagfles

Billopp wrote: »

zagflies

I don't know what your definition of a small group is! As far as I can see it will effect anyone who was contracted out up to April 1997 so if the person was young the last person who has a GMP will reach state pension age about 2035. The last person to have a full GMP from when it started in 1978 to 1997 would be reaching state pension age 2020-25 depending on what age they were when they joined the occupational pension scheme . It must be several million people. Some could have a potential loss of up to about £20,000.

Don't get me wrong. Everyone who has been contracted out pre 1997 will be adversely affected by the loss of GMP indexation. But the point is that other aspects of the single tier, particularly the ability to accrue further state pension, will more than make up for the loss of GMP indexation for the vast majority.

The "small group" refers to those for whom the overall impact of single tier is negative - which according to the actuarial analysis I've seen, is confined to those who reach state pension age in the couple of years post April 2016.

Have a look at the article " Losers who never knew in switch to single-tier pension" in the Saturday Independent dated 10 January 2014 by Neasa MacErlean

Which clearly states:

Because of the way the new system is designed, people in this group who retire after 2020 are far less likely to be disadvantaged
[...]
The picture is brighter for people who have a gap between 2016 and their retirement date as the new system will allow them to build up other entitlements that will compensate.

Are you sure the scheme is beneficial to you. I think you will gain about £1.10 to £1,15 week under single tier pension and will loose 1,4% NI rebate,Loose GMP increases and the other loss could be that your future accrual rate in your pension scheme will go from 60 ths to 70 ths as the employer will lose their rebate of 3.4%.

I, like the vast majority of private sector employees, am no longer in a contracted out DB scheme, I'm in a contracted in DC scheme but have deferred benefits in a contracted out DB scheme.

At the moment I'm accruing about £2pw in S2P every year, which is then being reduced because my deferred GMP (and hence COD) is increasing by fixed revaluation at a much higher rate than earnings indexation.

Under single tier, I'll accrue about £4.30pw from April 2016, and my deferred GMP will continue being increased but now without being offset by the COD increasing at the same rate.

I'm likely to work 5-10 years post April 2016, so the extra state pension accrual will way offset the loss of the GMP indexation, particularly as I have no pre 88 GMP and so I'll still get 3% indexation on my GMP.

Say a person was earning £30,000 a year and had 40 years service they would expect to receive £20,000 a year pension from their occupational pension scheme.

If the say were age 60 at and had another five years to go to receive full pension

they would receive 35/ 60ths times £30,000 =£17,500
5/70ths times £30,000 = £2,142
Revised pension of £19642 from the occupational scheme due to future accrual of 70ths due to employer loosing 3.4% NI rebate

A loss of £358 a year divided by 52 weeks making it a loss of about £6.88 a week for a gain of about the same amount by being able to accrue another five years of state pension under single-tier pension.

Eh? If this person had been contracted out all their working life, their foundation amount would be equal to the basic state pension (115.95pw), which would give them the ability to accrue 1/35th of the single tier (which is at least 151.25 according to http://www.parliament.uk/business/publications/research/briefing-papers/SN06525/the-new-single-tier-state-pension )
ie about £4.32 every year = £21.60pw over 5 years.

For a loss of £6.88pw in their occupational plan. So a net gain of £14.72pw.

Plus that extra £21.60 state pension will be indexed by the triple lock which is almost certainly better than the occ scheme indexation.

So at recent rates of inflation, the pensioner would have to have a very high GMP, inflation would have to be high, plus they'd need to live a long time for the net effect of single tier to be negative for them.

So as you will see if you also take into account loss of GMP increases and higher NI you will most probably be worse off than under the existing arrangements.

I have assumed that your pension scheme will go from 60ths to 70ths for future service as that is what people in the pension industry say is going to happen. Have also assumed your scheme will not pick up the cost of GMP increases normally paid by the DWP.

The worst scenario is that they could close down your scheme as final salary and change it to a defined contribution for future service.

They already have. Long before single tier was announced.

Martin51

Hi Billopp

Funnily enough I have already read these articles. I had already written to Richard Dyson a few weeks ago after reading his article in the MAIL. But no response as yet. It's not new news and they're probably fishing for new stuff while the Election is in progress.

I have also written to Martin Lewis's team expressing my dissatisfaction with the Government's actions.

I have also been in contact with Dr Ros Altmann, who has been in total agreement with what we are saying. Dr Altmann championed the causes of those poor souls whose schemes were wound up through company liquidations and the terrible effects such things had on their pensions. She prepared a submission to the Parliamentary Ombudsman -- see

rosaltmann.com/featureonFAS

rosaltmann.com/pdf/ParliamentaryOmbudsmanFinalSep2004

There are 29 references to GMP in the second link, the last of which is described within 'Example 4'. That particular example sums up the importance that the GMP held at the time (2004).

There's another aspect to the GMP -- see (sorry not allowed to use links!)

pensionsandannuities.co.uk/guaranteed_minimum_pension_gmp

Note the writer's comment, 'This can often mean that the GMP, although quite small initially, can amount to significant sums. Example: Suppose you left a scheme in 1987 and the amount of income promised for GMP was £1,000 per year. If you turn 65 in 2020, this £1,000 would increase by 8.5% per year. This would amount to around £14,760 per year in 2020. '

Thus, your GMP can grow quicker than the base pension. But wait. By removing the inflation proofing, the Government is turning a once-valuable asset into growing liability ...

It might take a professional submission to force interest by Parliament to review this shambles. Can we get Martin Lewis on board to expose the dodgy dealings?

Get pension schemes to protest on behalf of their members?

zagfles

Martin51 wrote: »

Note the writer's comment, 'This can often mean that the GMP, although quite small initially, can amount to significant sums. Example: Suppose you left a scheme in 1987 and the amount of income promised for GMP was £1,000 per year. If you turn 65 in 2020, this £1,000 would increase by 8.5% per year. This would amount to around £14,760 per year in 2020. '

Thus, your GMP can grow quicker than the base pension. But wait. By removing the inflation proofing, the Government is turning a once-valuable asset into growing liability ...

You do realise that in this case, under current rules, the person would have a massively negative additional state pension due to the fact that the COD will grow at the same rate as the GMP.

Earnings indexation on £1000 in 1987 is about £3500 today, perhaps £4000 in 2020. So this person's SERPS would be about £4000, COD would be £14760, so net additional state pension -£10,760 !! (ie zero would be paid).

How many years do you think it would take to get a positive additional state pension under current rules? Even with 4% inflation, it'd take over 30 years. With 3%, over 40 years. So almost certainly never, ie no indexation at all under current rules, so no loss because of the new rules.

Martin51

Zagfles
Thanks for your comments.

Presumably the fixed revaluation rates posited in the article are actuarial rates set by Government, and so are balanced between contracted-out and contracted-in, the idea being to keep GMP in line with SERPS accrual?

Do you believe that those who contracted out of SERPS actually got a better deal than those who contracted in?

And do you believe that the advent of the Single-tier is exposing that?

hyubh

Martin51 wrote: »

Presumably the fixed revaluation rates posited in the article are actuarial rates set by Government, and so are balanced between contracted-out and contracted-in, the idea being to keep GMP in line with SERPS accrual?

Not especially - that's more the idea of other revaluation option (section 148 orders, by which you revalue each year by the rise in average earnings). The idea of fixed rate revaluation is more to ease budgeting/lessen risk.

zagfles

Martin51 wrote: »

Zagfles
Thanks for your comments.

Presumably the fixed revaluation rates posited in the article are actuarial rates set by Government, and so are balanced between contracted-out and contracted-in, the idea being to keep GMP in line with SERPS accrual?

I'm not sure how the rates are calculated, but they're an option for schemes, they don't have to use them, they can use earnings indexation which would keep them in line with SERPS.

But most private sector schemes chose to use fixed revaluation, presumably because the costs are known, rather than earnings indexation where the cost would be unknown. In hindsight, it would almost always have been cheaper for them to use earnings indexation.

But therotically it should make no difference to the member what indexation is used, they should end up with earnings indexation regardless, since if they gain in GMP they lose in additional state pension, since COD=GMP, and ASP=SERPS-COD and SERPS is indexed by earnings pre state pension age.

So they should up with GMP paid by the scheme, plus SERPS-GMP paid by the state, meaning the level of GMP is irrelevant to the total they get.

But there's an anomaly as above, this can result in negative ASP, which isn't deducted from basic state pension (nor, I think, post 1997 SERPS/S2P, but not sure about that). So the amount paid is zero up until SERPS exceeds COD. SERPS will be indexed by CPI post state pension age, and COD will be indexed as GMP, ie not indexed for pre 88 GMP.

Do you believe that those who contracted out of SERPS actually got a better deal than those who contracted in?

In general, though obviously it depends on the scheme they contracted out into, their age, all kids of things.

And do you believe that the advent of the Single-tier is exposing that?

No. Overall single tier is hugely beneficial to those who've been in contracted out schemes, as long as they have a few years to accrue further NI record before state pension age.

The people who should be complaining the loudest are those who've been contracted in all their working lives. If they already have 35 years they will have no further opportunity to build more state pension. They will carry on paying the same NI but it won't buy them any more state pension.

Those who've contracted out can have their cake and eat it, they get their scheme pension partly paid for with the NI rebates, but they then have the opportunity to build further state pension, possibly up to the same level as those who've been contracted in all their lives!

That's not to say the GMP indexation issue isn't significant - it is, but specifically to those who reach SPA shortly after Apr 2016, or those who won't be accruing any further NI record after 2016 (eg taken early retirement). For others who've been contracted out, the "discrimination" in their favour will likely vasty outweigh the "discrimination" against them.

agarnett

That's not to say the GMP indexation issue isn't significant - it is, but specifically to those who reach SPA shortly after Apr 2016, or those who won't be accruing any further NI record after 2016 (eg taken early retirement).

Translated, this is what we are saying i.e.

The GMP indexation issue (the abdication of it) is a significant issue to all those contracted out all their lives:

1. who reach SPA shortly after Apr 2016
2. who won't be accruing any further NI record after 2016 (eg taken early retirement)

These are the people who should be shouting the loudest, and if they did, it would shake the roof because there are so many of them. These people are of course the second-half baby-boomers who are yet to reach SPA, although many find themselves effectively "retired" from their original expectations at much earlier age. They are the same people to whom contracting out was first introduced via DB schemes in the 70s. Those schemes were the norm for all larger private companies for all employees over 21 (it was a matter of pride that large companies, even supermarket chains looked after their workers with final salary pensions).

Then in the 80s, the personal pension DC route to contracting out was dreamed up, largely corralling those of the same age group who may have moved on to second or third jobs into further contracting out.

Those late baby-boomers who have kept their head down in the public sector will be alright, although I do feel for those who have been TUPD or more likely duped, into the private sector.

But now, those who have spent their careers (and are spent) in the private sector, just as the pension promises need to be kept, are finding they were led into a trap, with promises now abdicated and the guts of the promises being eviscerated whilst the general onlooking audience is encouraged to jeer about cake and eating it.

Talk not of SERPS or S2P or GMP - this is more like Braveheart 2


It is actually mass age discrimination of a very nasty type that we might only expect of politicians and others who have accumulated too much power - many of whom would serve us better with a bullet in the neck.

Martin51

Zagfles
That's a very impressive analysis, thanks.

Almost invariably when a new system is introduced there are losers, neutrals and winners -- and various flavours thereof. The IFS's excellent study pointed out that in the long term, once all of the current generation of mixed flavours is shaken through, those coming into the single tier will, of course, be all contracted in and their benefits will be capped under the single tier, and so in fact overall will be getting less than is possible under the current system. So, from Government's perspective less will be paid from the State's coffers -- with a the double benefit of lower administration costs, although DWP say that overall it will be cost neutral.

Martin51

AGarnett
Wow, a truly impassioned piece!

You are obviously as angry as me.

With regard to your comment "whilst the general onlooking audience is encouraged to jeer about cake and eating it", here is what Steve Webb told me:

"However, in a pay-as-you-go system, where each generation trusts the next for pension provision, there is a limit to what we can ask of today's contributors. Unlike the price-protected basic State Pension in payment for most of the time Martin51 was building his GMP, primary legislation is now in place which will require that his State Pension will be uprated by at least earnings."

Fantastic! What a generous man! This is a feeble, lame excuse by someone who knows that what is being done is piracy. So, will those who either (a) contracted into the Additional State Pension or (b) contracted out of SERPS in the public sector NOT be receiving inflation protection either?

The unevenness is so obvious. But note the following:

'The Minister’s only argument – and I stress the only – is that it is “non affordable”.

The Advocate General at the European Courts of Justice, Juliane Kokott, stated that “It must be realised that budgetary considerations cannot justify discrimination”. This formed the basis of a UK Supreme Court judgement which upheld the claim of part time judges that they should have pension parity with their full time colleagues (“cost can never objectively justify discrimination”).'

So this would put the Minister's view at odds with the European Courts.

This is not a rant against the public sector but rather a means to have parity with!

AGarnett: Do you have a feel for how many PRIVATE sector casualties there are likely to be in the immediate aftermath of Brave New World? Cheers

agarnett

Martin51 wrote: »

Zagfles
That's a very impressive analysis, thanks.

I agree zagfles' analysis is useful in helping us understand some of the apparently anomalous indexation and other calculation challenges, but I feel the assumptions of fairness used are perhaps as flakey as my own may still be in trying to argue what may be an almost diametrically opposed case!

I was originally trained in science and thus problem-solving of a type where knowledge plots a route so far, and you know what you wish to achieve even though it may involve a leap of faith initially, but the secret is being able to set about bridging the gap between the two points with robust logic. To know what you wish to achieve then you must have some vision of course, and of course with all the knowledge in the world, you always need to fully understand your start point.

I am one who likes to constantly reaffirm my thoughts by looking at worked examples, and grouping or categorising them whilst looking for important patterns, based on what I think I can see and what I think I know. I am sure I have no prior claim to that way of thinking

And that's loosely what I did before I dared very subjectively to talk about second-half baby-boomers with the suggestion that some of the past government initiatives on cost of pensions have been targeted at us, particularly, as a group as we have been plotted no doubt by government analysts moving through careers in patterned ways, and generally through our lives and the systems which govern our educations, taxes, health and welfare.

I will admit to secretly allowing myself simplistic thoughts like

• "Was it those oh so well educated and clever first-half baby boomers who grabbed the levers of power and then pulled up the drawbridge, after they had grabbed significant wealth for themselves?" and
• "Yes and how much do those Whitehall mandarins cream off with their gilt-edged packages which now easily rival the best the private sector ever offered?"
• "And those armies of central government and local government employees - are they really worth their packages which would I think demand much greater dedication and stressed lives to successfully garner in the private sector?"
• "And aren't they the ones who more likely than private sector oppos will have been contracted in all their working lives and have the amazing £160pw+and even £200pw+ state pension entitlements under old rules?"
• "But should we remember those, especially the lower paid ones, who have been TUPE'd out of actual local government into outsourced roles where they are exploited by more ruthless private sector employers", and
• "Where is the strongest trades union representation of employee groups?" "Are Civil Service unions far more effective than private sector union representation?"

So yes my gut feelings are impassioned, but like you, I really wish I could identify the winners and losers far more accurately as groups. I don't really wish to see unfair discrimination against any group, but if the system is to be streamlined to save costs, then I don't want those who in the last 15 years have started to become big winners anyway in the DB pension stakes to get away with claiming that because they were contracted in, they are now going to be the biggest losers.

Like hundreds of thousands of us, I have never been much interested in pensions until the recent changes started to affect my thinking, so I personally cannot understand how anyone earns a state pension of much over £165 per week. Why £165 pw? Because that's the highest I have ever seen and it is my father's and I have seen the Graduated and AP breakdowns but still don't really get it. His £165 is without him ever having claimed pension credits even though I think he could have done, whilst my mother gets only £65 pw for her state pension which I didn't know until recently.

I would like to see far more public statistics on who gets what currently on state pensions. An interactive pie chart would be great for starters showing state pension totals by bandings and by numbers in those bandings, and with the facility to click and drill down into genders and age groups too, and into membership of principal occupation groups as mapped from the lion's share of an individual's qualifying years - so not their retirement occupation, but the occupation in which the majority of their qualifying state pension years were earned. This is such an important welfare cost to the UK that we should all be able to see it presented that way right now. Maybe government insiders think we aren't able to handle the truth?

In the UK we seem far too keen to generalise (I am as guilty as any once i get into full flow ). That isn't really necessary if data is so easy to collect and analyse, but as you say, Martin51, where might we find it? I have no doubt it exists, but I doubt much is usable in the public domain without a great deal of clever recombination. Tomorrow I might have a go at unearthing some nevertheless. I don't know if ONS has anything I can hang my hat on - maybe something like this: Pension Trends – Chapter 7: Private Pension Scheme Membership, 2014 Edition

But yes I must admit (if it wasn't immediately obvious ) that I agree that recognising a need for increasing typical private sector pensionists' lots to achieve closer parity with their public sector oppos is probably the fairest aim to analyse and to try to uphold if it can be evidenced as well as we think it can.

As a taster ... here's an interesting first chart I have managed to create quickly using some Mid 2013 population data from ONS:

Note that all those aged 55 now are shown as aged 53 on the chart - that's over ¾M and in the next 5 years around 4M will reach age 55.

Further along the chart there is a very marked spike aged 67 on the chart who are now aged 69. They are indeed the peak of the group I called the first half baby-boomers, following WW2. That spike is almost ¾M too (that's how many had had their 67th birthday by mid 2013 but were not yet 68) and that's after some of course will have died between age 53 and age 67 and not made it to this chart.

So, as we probably guessed already, and simplistically put by me here, the government has swallowed whole the first hump of baby-boomers reaching age 65, but after a brief respite sheltering in a trough has now shied from the next hump which is due to begin to hit this year, surprise surprise!

Just in case anyone is wondering, that's a false spike at age 90 - all persons aged 90+ are shown as aged 90.

Here is a breakdown of males and females with 2013 v 2003 comparison which may be worth looking at:


Finally before late bedtime, maybe this table might start us off in trying to answer Martin51's question about contracted out private sector casualties:


And I can't resist one more - numbers of active members in Private and Public Sector occupational schemes showing DC and DB splits:

If anyone wants more of where those came from look here: Occupational Pension Schemes Survey, Reference Tables, 2013 (Excel sheet 368Kb)