My deferred DB pension has fallen in value?!

FatherAbraham

I don't understand this at all.

As a deferred member of the BT final-salary pension scheme (section C, left service in Spring 1995), I asked for a current valuation of my benefits in February 2013.

This year I asked again, in March.

The more recent value, at around £3450 per year, is lower than the £3550 or so I was quoted just over two years ago.

I understand that there are situations where a deferred DB pension scheme might not protect fully against inflation, but I didn't expect the nominal value of my benefits to fall.

I queried the reduction with the administrator (Accenture), and have received an explanation which doesn't make sense to me:

The Current Value which you received recently only showing a decrease from your previous Current Value, was revalued under the current process, set by the Government, where the Guaranteed Minimum Pension (GMP) element of your Pension is firstly deducted from your Pension value, then the pension is revalued under Consumer Prices Index (CPI) published by the Government, then the GMP value is then added back on to the revised pension figure. The GMP element will not increase until you reach GMP payment age, then when you decide to take your pension, on the GMP we will carry out a check to make sure that the pension you are receiving meets the minimum required by contracting out laws, if necessary, the GMP element of you pension will be increased.

As far as I can tell from that explanation, the GMP part is static at present, and the excess is revalued according to CPI. Since CPI hasn't been negative for the past two years, I cannot understand how my pension's current value can have decreased in nominal terms.

What am I missing? How can a defined-benefit pension's current value have declined in the last two years?

Scheme normal retirement age is 60; I'm male; my state pension age is 66 or 67.

Thanks for any enlightenment,
FA

Drp8713

The explaination doesnt add up to me, as you say, an element remaining static would not decrease the pension.

My guess is one of these 3 scenarios.

1. You have reached the scheme minimum early retirement age e.g 55 and the current value now includes an early retirement reduction to indicate what you would actually get if you retired now.

2. There is some element of estimated revaluation and they have now changed the method, e.g RPI to CPI or Fixed rate GMP should have been Section 148.

3. One or both of the statements are wrong.

FatherAbraham

Drp8713 wrote: »

1. You have reached the scheme minimum early retirement age e.g 55 and the current value now includes an early retirement reduction to indicate what you would actually get if you retired now.

I'm too young for that to be the case (but sorry for not giving my age, which is almost 48), however, it's an interesting and plausible general explanation. for some cases.

Drp8713 wrote: »

2. There is some element of estimated revaluation and they have now changed the method, e.g RPI to CPI or Fixed rate GMP should have been Section 148

I'd wondered abot RPI versus CPI too, although Julain Mainwood of Barnett Waddingham (https://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/) claims that change took effect in 2011, so should have affected both quotations.

Thanks for the suggestions,
FA

xylophone

When you left the Scheme and became a deferred member, were you given a statement showing your pre 88 GMP, post 88 GMP and excess at date of leaving?

How does the GMP increase in deferment?

How does the excess increase in deferment?

You are entitled to take your deferred pension at 60?

Will this pension be the revalued excess plus unrevalued GMP?

How will the pension increase in payment?

What will happen about pension increases at GMP age(65 for a man)?

See https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/

https://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/

FatherAbraham

xylophone wrote: »

When you left the Scheme and became a deferred member, were you given a statement showing your pre 88 GMP, post 88 GMP and excess at date of leaving?

Hmm... I have a certificate of deferred benefits, claiming that the pension benefit at date of leaving was £2200 pa, which includes a GMP of "N/A".

There's no pre-1988 GMP for sure, because that precedes beginning of employment.

That certificate is almost certainly incorrect in as far as it claims there's no GMP, and indeed, I have a statement of benefit from mid-2001, which shows the current value as £2650 pa, including a GMP of £530 pa.

xylophone wrote: »

How does the GMP increase in deferment?

I have a letter from the administrator from July 2000, which says that the GMP is revalued according to RPI.

The current-value letter from Spring 2013 explicitly states that the GMP element is revalued according to Section 148 Orders.

xylophone wrote: »

How does the excess increase in deferment?

The 2000 letter says that the non-GMP part increases by "RPI capped at 5% pa over the whole period up to the point where the pension commences".

The 2013 letter states that the excess is revalued in accordance with Occupational Pensions (Revaluation) Orders issued by HMRC -- with an (annual) 5% cap on the increase to be applied.

xylophone wrote: »

You are entitled to take your deferred pension at 60?

The pension scheme's normal retirement age is 60. There is no provision for deferring the benefit beyond that age.

xylophone wrote: »

Will this pension be the revalued excess plus unrevalued GMP?

The 2015 letter says: "Increases on the GMP aren't applied until you reach GMP Payment Age (currently age 60 for women and age 65 for men)".

xylophone wrote: »

How will the pension increase in payment?

The letter from 2000 says that pensions in payment are revalued in a different way to deferred pensions, and mentions RPI. I think that means that revaluation of pensions in payment is uncapped, although it's possible that the RPI indexation has now been replaced by CPI, given that the most recent letter refers to CPI rather than RPI.

xylophone wrote: »

What will happen about pension increases at GMP age(65 for a man)?

The 2015 letter confirms that increases on the GMP will be applied at 65. That's not what you asked, which is about the entire pension payment, and I don't know the answer to that.

You've asked a number of questions relating to the mechanics of future increases, which I hadn't considered as relevant for a decrease in current value.

Warmest regards,
FA

xylophone

I have a letter from the administrator from July 2000, which says that the GMP is revalued according to RPI.

http://www.prospect.org.uk/news/story/2010/November/4/BTPS-Pensions-

http://www.legislation.gov.uk/uksi/2015/187/pdfs/uksi_20150187_en.pdf

You will be entitled to draw your deferred pension at 60.

Presumably, once in payment, the whole of the pension will increase as per Scheme rules.

At 65, the Administrator will check that you are receiving at least your revalued GMP and if not any appropriate increase will be applied?

You have no pre 88 GMP so after you reach age 65, that part of your pension that relates to your revalued GMP will be increase by up to CPI 3% by the Scheme, the balance as per Scheme rules.

See also from BW link


Furthermore from 6 April 2016, and the introduction of the Single State Pension, the Government will not be paying any appropriate increases relating to pre/post 6 April 1988 GMP along with the state pension.

I cannot understand how your statement of deferred benefits can ever have shown that you had no GMP - you appear to have joined a contracted out FS scheme after 1988 but before 1997 so there has to be a GMP.

I would suggest that you telephone Accenture ( have your figures and questions prepared and a notebook to hand), to clarify your exact situation.

sandsy

FatherAbraham wrote: »

The 2000 letter says that the non-GMP part increases by "RPI capped at 5% pa over the whole period up to the point where the pension commences".

The 2013 letter states that the excess is revalued in accordance with Occupational Pensions (Revaluation) Orders issued by HMRC -- with an (annual) 5% cap on the increase to be applied.

I suspect this is the reason for the drop. They've changed the way they revalue the excess over the GMP. There appears to be two changes here:
a) firstly, from RPI to CPI, and
b) from "over the whole period" to "annual".


a) on its own shouldn't have reduced the benefit as RPI should have been applied up to the point where CPI cut in. But applying RPI annually then CPI is annually is different from applying RPI over the whole period.


I wouldn't expect that if the trust deed and rules specified RPI over the whole period that the scheme should automatically be applying the revaluation orders. I thought that only happened when the trust deed and rules specified revaluation orders in the first place.

xylophone

I wouldn't expect that if the trust deed and rules specified RPI over the whole period that the scheme should automatically be applying the revaluation orders. I thought that only happened when the trust deed and rules specified revaluation orders in the first place.

See first link in post 6.

FatherAbraham

sandsy wrote: »

I suspect this is the reason for the drop. They've changed the way they revalue the excess over the GMP. There appears to be two changes here:
a) firstly, from RPI to CPI, and
b) from "over the whole period" to "annual".


a) on its own shouldn't have reduced the benefit as RPI should have been applied up to the point where CPI cut in. But applying RPI annually then CPI is annually is different from applying RPI over the whole period.


I wouldn't expect that if the trust deed and rules specified RPI over the whole period that the scheme should automatically be applying the revaluation orders. I thought that only happened when the trust deed and rules specified revaluation orders in the first place.

The problem with this explanation for the drop in the value of current benefits is that the reduction occurred between the 2013 quote and the 2015 one. So the changes to revaluation method were already in place when the higher, earlier current value was calculated.

I still don't see how the nominal value can fall.

Warmest regards,
FA

Finst

The explanation you quote from Accenture is a standard explanation of the revaluation terms, and in no way attempts to explain your actual question. I would be writing to them with copies of both statements and demanding a proper explanation (with a threat to raise a complaint if it isn't dealt with).

I can think of a few reasons for the reduction. In order of most likely to least likely:

1. Its a mistake in one of the statements

2. The figures quoted are projected to your retirement date with an estimate of what future inflation will be. As the 2nd statement has fewer years to run and inflation has been quite low recently, this would explain a drop

3. Although the change to CPI takes effect from 2011, a lot of pension schemes had to take extensive legal advice to see whether it would apply to them. It may be that the statement in 2013 was before they had got a definitive answer

xylophone

I still don't see how the nominal value can fall.

Post 6 last paragraph.

You know what your GMP and pension were at date of leaving - ask Accenture to set out in writing and with the relevant figures for the years in question, how your deferred pension is increasing in deferment.