indexation and gmp

frugal90

I am a teacher and will retire in 18 months at the age of 56

I plan to pay voluntary nat insurance to max out the new state pension.

I have been sent this link and have not got a clue what it is on about, is there anybody out there much brighter than me that can summarise the likely impact for those in receipt of a public service pension?




http://www.gov.uk/government/consultations/indexation-and-equalisation-of-gmp-in-public-service-pension-schemes


thanks

frugal

hugheskevi

The part of your pension which you accrued from service between 1978-97 is divided into two parts - Guaranteed Minimum Pension (GMP) and excess over GMP. Every pension will be different, but you might have something like 20% of your pension as GMP and 80% as excess over GMP for service between 1978-97.

The GMP bit is what the scheme had to provide due to being contracted out, and has its own set of rules laid down by the Government. Part of those rules is that before 2016, the annual increase on the bit which is GMP was paid in an odd way, with some of the increase being paid by DWP through the State Pension, and some by the scheme.

After 2016, the change in State Pension mean that the State no longer has an obligation to increase the bit of pension it previously would have increased for those reaching State Pension age after 2016. The Govt. has decided that public service pension schemes should increase the GMP bit fully (ie schemes take over from the State) for those reaching State Pension age between April 2016 and December 2018.

The consultation is about what should happen for those reaching State Pension age after December 2018. Broadly, the options are:

• No increases paid - most of the group affected will have higher new State Pension, and overall be better off despite the loss of indexation
• Schemes fully index the GMP so no-one loses out
• Compensate the small numbers who do not gain from the change, possibly by giving them full indexation

There is also a linked but separate equality issue between males and females, but that is probably a secondary issue, and depending on what is decided about indexation might be irrelevant.

is there anybody out there much brighter than me that can summarise the likely impact for those in receipt of a public service pension?

This is just a consultation - it is the Govt. response to the consultation in due course which is required to summarise impact.

xylophone

https://www.teacherspensions.co.uk/news/public-news/2016/03/pension-increases-for-teachers-after-5-april-2016-and-guaranteed-minimum-pensions.aspx

Here is what used to happen with LGPS - other public service DB Schemes were similar.


"Example: Pensions Increase
calculation where the last day of
service was after 5th April 1988


Mr Smith retired in 2000 at the age of 65.
His LGPS pension was £200.00 per month.

This included a GMP of £90.00 per month,
of which £25.00 was earned after 5th April
1988.
The increase due in April 2001 was
calculated as:
Original LGPS pension: £200.00
Less GMP earned after 5th April 1988:
£ 25.00

Less GMP earned before 6th April 1988:
£ 65.00

Pension to be increased: £110.00
(£110.00 x 3.3%) + (£25.00 post-88
GMP x 3%)
£3.63 + £0.75 = £4.38
Therefore Mr Smith’s LGPS pension went
up by £4.38 to £204.38 per month made
up as follows:
Original LGPS pension: £200.00
Pensions Increase: £4.38
Total: £204.38

The balance of the 3.3% PI award on
his GMP earned after 5th April 1988 was
paid by the DWP, along with the full PI
award on his GMP earned before 6th
April 1988.
So Mr Smith’s total pension
in respect of his Local Government
service was increased by 3.3%. This can
be checked as follows:
Total increase due: £200.00 x 3.3%
= £6.60
Increase paid by us: £4.38
Increase paid by the DWP: £2.22
(£65 x 3.3%) + (25 x 0.3%)

Total increase paid: £6.60"

greenglide

There is also a linked but separate equality issue between males and females, but that is probably a secondary issue, and depending on what is decided about indexation might be irrelevant.

But isn't the issue over equality not the reason why the public sector schemes are indexing GMP for all members with an SPa up to December 2018 (kicking the can down the road)?

I still don't see how they get away with treating public sector differently from private sector in this issue although I personally am glad they have as all my GMP is in LGPS.

hyubh

hugheskevi wrote: »

There is also a linked but separate equality issue between males and females, but that is probably a secondary issue, and depending on what is decided about indexation might be irrelevant.

As greenglide says, that's the entire justification for completely ruling out considering public and private sector final salary schemes together on the issue (see the bit in the public sector scheme consultation where the private sector scheme one is referred to).

In short, if GMP isn't fully indexed for new cases, then the differing GMP ages for men and women will create a sex equality issue where there never was one before for public sector schemes, given how GMP and excess closely interact in them. (Most) private sector schemes, in contrast, already have an equalisation issue from GMP and excess being more distinct, and the government never resolving the issue of differing GMP ages for men and women following Barber.

hugheskevi

But isn't the issue over equality not the reason why the public sector schemes are indexing GMP for all members with an SPa up to December 2018 (kicking the can down the road)?

As well as for equality issues, it is also because the Govt. takes the view that it has an obligation to index the occupational pensions of public servants due to historic documents and Govt positions, the relevant consultation text being (my bolding):

Under the arrangements that previously applied the public service pension and the AP system worked in tandem, providing a mechanism that fully indexed and equalised pension payments (state pension and occupational pension) of public servants, in line with commitments made to these members by previous governments.

So the right to full GMP indexation is considered a property right which public sector employers must provide ultimately stemming from interpretation of the employment/pension contract. However, that right can be fulfilled in a number of ways, one of which would be if individuals affected receive a higher State Pension via the new State Pension than they would otherwise have received. Those reaching SPA between April 2016 and December 2018 are much less likely than future pensioners to gain enough from the new State Pension to offset the lost indexation, hence the temporary protection.

The equalisation issue stems from European equality law. To date, the Govt. considers that the requirement to provide equal treatment is met by full indexing GMPs which will result in the GMP and excess over GMP being increased by the same rate. The extension to December 2018 preserves this position, so it is part of the reason for the extension along with the property right issue above. If the Govt decides to continue to fully index GMPs via schemes, presumably their previous consideration that this meets the equality duty would continue and no further action due to equalisation requirements would be required. If however they moved away from full indexation, action to ensure equal treatment would be required. Something like a better-of test would be required by schemes, treating the individual in whichever way (male or female) that gives the best member outcome.

I still don't see how they get away with treating public sector differently from private sector in this issue although I personally am glad they have as all my GMP is in LGPS.

Because private sector employers may not have given their staff the same commitments made to public sector members by previous governments, relevant bit of consultation being:

It is for private sector employers to conclude if they are meeting any commitments to index scheme pensions they may have previously made, whether directly as an employer or through the pension scheme rules.

xylophone

It is for private sector employers to conclude if they are meeting any commitments to index scheme pensions they may have previously made, whether directly as an employer or through the pension scheme rules.

Disingenuous - was it not the government of the day which wanted to encourage private employers to offer pension schemes and therefore offered the sweetener of lower NI and index linking of the (AP) GMP at GMP age (which used to align with SPA)?

Of course this commitment was watered down post 1988 (which accounts for the pre 88 GMP/post GMP split.

http://s05.static-shell.com/content/dam/shell-new/local/business/pensions/downloads/pdf/guaranteed-minimum-pension-factsheet.pdf