How are 'statutory' pre-retirement DB increases calculated?

ratechaser

Hi all,

I have a legacy DB pension from a rather well known bankrupt bank. Fortunately it looks like it will pay out when I get to retirement age, and I have received a statement of benefits - however the annual payment calculation (for when I hit 60) is set as at the date I 'left' the bank, about 8 years ago.

It goes on to say that increases to this sum prior to my retirement will be 'statutory', with a note mentioning that broadly this is is RPI until 2011, and then CPI after that, with an overall 5% annual CAP.

So my question - if this is a 'statutory' increase, is there a precise calculation that the pension company has to follow, e.g. once annual uplifts, based on a CPI/RPI point in a particular month? Something that I can also use to keep them honest!

I have tried asking the administrator for a current annual figure, but they are only doing this for people approaching retirement age, so I'm going to have to work it out for myself!

thanks
RC

hugheskevi

DWP publish annual Revaluation Orders setting out the increases - latest one available at http://www.legislation.gov.uk/uksi/2015/1916/pdfs/uksi_20151916_en.pdf.

It is a point-to-point revaluation, rather than an increase applying every year.

ratechaser

hugheskevi wrote: »

DWP publish annual Revaluation Orders setting out the increases - latest one available at http://www.legislation.gov.uk/uksi/2015/1916/pdfs/uksi_20151916_en.pdf.

It is a point-to-point revaluation, rather than an increase applying every year.

Thank you, so reading that, my current uplift as at 1 Jan 2016 should be 13.5%, plus whatever pro-rated amount would cover the period between September-December 2008.

RichandJ

ratechaser wrote: »

Thank you, so reading that, my current uplift as at 1 Jan 2016 should be 13.5%, plus whatever pro-rated amount would cover the period between September-December 2008.

It's generally not pro rated for months but based on complete years between leaving & date of retirement.

ETA. Most administrators of DB schemes these days, like my current employer, do not like projecting benefits beyond the current year. There are too many variables & risks that can change, which they, not necessarily me doing the actual calcs, feel can leave them open to complaints, legal action etc.

Inflation risk, political risk, unexpected changes in scheme factors to name but a few.

Once upon a time administrators, including in-house ones, used to send out leaving statements which assumed 5% inflation. Oh what fun we have with people who received one of those, didn't read or disregarded the caveats, and think that is their written in stone entitlement.

ratechaser

I suppose I could have guessed that it would be full years only. In any case, it's not a huge pension, so not going to make much difference either way!

I can certainly understand the reticence of administrators to provide forward dated projections (and the required statutory ones generally come with some pretty sarcastic disclaimers!). I was just a bit narked that I couldn't even get them to give me a projection as of today, and only had the figure from 8 years ago to go on...

uk1

ratechaser wrote: »

I suppose I could have guessed that it would be full years only. In any case, it's not a huge pension, so not going to make much difference either way!

I was just a bit narked that I couldn't even get them to give me a projection as of today, and only had the figure from 8 years ago to go on...

Perhaps it is because their experience shows that those that ask for a projection on such a small amount are also likely to be the one's that get narked if it turns out to be 2p less than the projection when they get it and it just saves them time .......;)

Jeff

ratechaser

As Mr Micawber might observe, that 2p could just be the difference between happiness and misery :cool:

( oh alright, it was a shilling difference overall, to save any pedantic corrections!)

zagfles

A side effect of way this revaluation works, which can be well worth bearing in mind - is that the pension value can change (sometimes significantly) at two points in the year - the anniversary of when you left the scheme (as an extra year counts), and the turn of the year (when a different set of years is used).

If you left the scheme in a year in which inflation was high - you'll likely see a significant drop in your pension on 1 Jan each year (while current inflation is low), then a rise on the anniversary of leaving the scheme.

pandakins99

zagfles wrote: »

A side effect of way this revaluation works, which can be well worth bearing in mind - is that the pension value can change (sometimes significantly) at two points in the year - the anniversary of when you left the scheme (as an extra year counts), and the turn of the year (when a different set of years is used).

If you left the scheme in a year in which inflation was high - you'll likely see a significant drop in your pension on 1 Jan each year (while current inflation is low), then a rise on the anniversary of leaving the scheme.

That is a really important point Zagfles. I am currently working in an in-house pensions department with a legacy DB scheme. Given the way the revaluations have worked recently we have had quite a few deferred pensioners, who want to draw early, decide to hang on until after the 'anniversary' of their leaving date. It can make quite a difference.

woolly_wombat

zagfles wrote: »

A side effect of way this revaluation works, which can be well worth bearing in mind - is that the pension value can change (sometimes significantly) at two points in the year - the anniversary of when you left the scheme (as an extra year counts), and the turn of the year (when a different set of years is used).

If you left the scheme in a year in which inflation was high - you'll likely see a significant drop in your pension on 1 Jan each year (while current inflation is low), then a rise on the anniversary of leaving the scheme.

Zagfles, I wonder if you can confirm that it's the GMP element which is increased on the anniversary of leaving?

I have a legacy DB pension from a computer manufacturer that I left in 1985 and so receive no revaluation on benefits in excess of GMP. The GMP is increased by a fixed 8.5%.

I've had a look at a couple of links which are sometimes referred to on this board:
https://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/
and:
https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/

The second link states that:
"GMPs receive an increase on every 6 April from date of leaving to retirement, but not including the 6 April immediately prior to GMP age (65 for men, 60 for women)."

It doesn't appear to explain when the increase is actually applied, which I found rather confusing.

Thanks in advance.

SnowMan

woolly_wombat wrote: »

Zagfles, I wonder if you can confirm that it's the GMP element which is increased on the anniversary of leaving?

I have a legacy DB pension from a computer manufacturer that I left in 1985 and so receive no revaluation on benefits in excess of GMP. The GMP is increased by a fixed 8.5%.

I've had a look at a couple of links which are sometimes referred to on this board:
https://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/
and:
https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/

The second link states that:
"GMPs receive an increase on every 6 April from date of leaving to retirement, but not including the 6 April immediately prior to GMP age (65 for men, 60 for women)."

It doesn't appear to explain when the increase is actually applied, which I found rather confusing.

Thanks in advance.

Because you left before 1st January 1986, no statutory increases apply to the excess over GMP, although because you left after 1st January 1985 they cannot offset the increases to your GMP against the excess of your deferred pension over GMP at leaving.

So the only increases to your deferred pension are statutory increases to your GMP (unless the scheme is more generous which it isn't here it seems).

GMP increases (in your case at 8.5%) for each complete tax year between leaving and GMP age (65/60 for males/females). So if you left on 1st June 1986 and reach GMP age on 1st May 2026 (say) then your GMP at leaving is increased by 1.085^29 (as there are 29 complete tax years between 1/6/86 and 1/5/2026) . The calculation is precisely specified, so they calculate the 1.085^29 to 3 decimal places etc etc.

But it is worth noting there is no concept of a GMP at any date between leaving and at age 65/60 (although there is a specified calculation for GMP on death but that's a separate matter).

So questions such as what is my GMP on 1st June 2016 when I am 59, doesn't have an answer, your GMP only exists at leaving and at GMP age (and not at any point in between). Where increases on GMPs are in line with say national average earnings, which isn't the case with your scheme, then essentially the statutory orders that prescribe the revaluation are based on the GMP increasing on every 6th April except the last, but that doesn't mean the GMP physically goes up on each 6th April, as it only exists at leaving and at GMP age (and disappears into the ether inbetween).

However sometimes because of scheme rules/practice there will be a need for a scheme to revalue a GMP up to a date before age 65/60.

For example a scheme might calculate an early retirement pension by revaluing deferred benefits up to the early retirement age (say 59) and then applying an early retirement factor. So in calculating the revalued pension to age 59, the scheme has to decide how to revalue the GMP element up to age 59, before adding it to the revalued excess and applying the early retirement factor. How it does that is either determined by the scheme rules, or more likely if the scheme rules are silent on this according to custom and practice (as determined by the Trustees and actuaries). So it might apply GMP increases on each 6th April up to age 59 or it might be for each complete tax year between leaving and age 59 (i.e. one less). But really the GMP here at age 59, used in that calculation, is purely a notional one. The GMP only formally exists at age 65/60 at which point the early retirement pension must be at least equal to the GMP revalued to GMP age.