Should my Pension escalate annually

Pension12

I have a Section 32 Pension with a Guaranteed Minimum Pension (GMP), the fund value is such that it will only pay out the GMP. My pension provider says I am therefore not entitled to annual increments to my Guaranteed Minimum Pension because the contributions were made before April 1988, even though the policy date is 25 04 1989, which I thought would have entitled me to the statuary RPI/3% annual increments.

More importantly, reading my policy document I believe that it states my pension should raise by 5% per annum. Below are what I believe to be the relevant parts of the policy and I would welcome the views of others as to whether or not they think annual increments should be applied to my pension.

1. Condition 7: At the benefit date or the Substitute Benefit Date subject to the election of the Insured under Condition 8 so much of the Capital Sum shall be appropriate shall be applied using the Society's then current annuity rates to purchase an immediate pension payable to the Insured which shall not be less that the Guaranteed Minimum Pension or more that the Maximum Pension …........ etc
2. Condition 9: Pensions purchased under Condition 7 shall increase at the Escalation Percentage Rate specified in the Second Schedule. If the an Escalation Percentage Rate is not specified the Insured may elect that the pensions purchased shall increase a percentage rate not exceeding 8.5% compound per annum. The increases in pension shall apply from each anniversary of the Benefit Date or the Substitute Benefit Date.

The Second Schedule states:

1. GUARANTEED MINIMUM PENSION
   
   £xxx.xx per annum increased by 8.5% compound for each complete year from 6th April 1988 to the 6th April immediately preceding the attainment by the Insured of the State Pensionable Age of 65 or the Insured's death whichever is the earlier.
2. ESCALATION PERCENTAGE RATE
   
   5% per annum compound

To summarise Condition 9 states that pensions paid in accordance with Condition 7 should escalate by the rate specified in Schedule 2. I can't see anywhere where it states the escalation should not apply to the GMP, hence my believe that my pension should escalate.

What do the community think? Thanks in advance for any and all comments.

xylophone

You may have taken out the policy (transferred in a DB pension from a previous employer?) in 1989 but the GMP related to pension accrued pre 89.

The insurer has no obligation to increase pre 88 GMP in payment.

It appears that your pension consists only of pre 88 GMP?

http://www.financialadvice.net/s32_buy_out_plan/zone/1288

Pension12

Thanks for the reply, I understand that the increments for pre 88 GPMs were supposed to be covered by the state pension scheme rather than the pension provider, that is until the recent pension reforms. However, in this case there appears to be a guarantee of a 5% increment built into the policy so surely this overrides any general rule relating to increments?

xylophone

Thanks for the reply, I understand that the increments for pre 88 GPMs were supposed to be covered by the state pension scheme rather than the pension provider, that is until the recent pension reforms.

Even under the old rules, when the GMP on a deferred pension revalued in deferment by fixed rate, the Contracted Out Deduction ( which more or less equated to the revalued GMP) was usually much higher than the notional Additional State Pension so that there was no increase on pre 88 GMP paid until the one was exceeded by the other - this could take a very long time.

Look at this old rules pension statement post 22 here

http://forums.moneysavingexpert.com/showthread.php?t=4532605&page=2

and note the amount of the contracted out deduction against the
pre 97 Additional State pension.


This thread http://forums.moneysavingexpert.com/showthread.php?p=72002907

may be of interest.

Pension12

Hi, thanks once again for the reply. I've looked at the other thread and understand it. However, the straw I am clinging on to is that clauses 7 and 9 of the policy as worded combined with the second schedule, with neither having exclusions, mean the provider, all be it unwittingly, has committed to a 5℅ annual increment regardless of government rules relating to the incrementation of GMP.

xylophone

See https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/ in particular the information concerning rates for revaluation of GMP in deferment.

The term EPR seems to me to mean GMP revaluation in deferment.


Your policy seems to indicate that EPR will be either 5% or up to 8.5%.

Revaluation at this rate ceases at GMP age.

Under the general GMP provisions, the insurer has no obligation to index link pre 88 GMP.

Your pension is all pre 88 GMP.

However, in the last resort, you have the option to raise the matter with the Pensions Ombudsman.

Pension12

Hi again and thanks for the response, I'm finding this exchange most informative and helpful.

My reading of the policy is that the revaluation up to SPA (GPM in deferment), which is later this year, is 8.5% as required and stated in the first clause of the Second Schedule. The EPR of 5℅ on the other hand is defined in Clause 9 as specifically being applicable to the pension payments being made in accordance with Clause 7, which in this case because of the fund value is initially equal to the GMP.

It seems they may have been a bit sloppy in writing the policy, probably because back in the days of high interest rates and inflation they expected the pension payouts to be greater than the GPM and wanted to limit the annual increments to a level where they still had a decent margin (profit) on the fund. So in this case the small print may be in the customer's favour.

xylophone

I see your point but it still seems to me that the matter does revolve around the statutory requirements regarding increases on GMP in payment.

The S32 had to protect and revalue the GMP but only to the extent that it would have been protected and revalued in the originating scheme?

Had the person remained in the occupational pension scheme, the scheme would not have been obliged to pay any increases on pre 88 GMP after GMP age.

It appears that in your case, the investment returns on your policy are either only just enough to meet your revalued GMP or are not enough to meet it and the insurer is having to make up the shortfall.

The insurer is only absolutely obliged to pay you your revalued GMP.

All your GMP is pre 88 and therefore the insurer has no obligation to increase it in payment.

All that said, you do have the right to refer the matter to the Pensions Ombudsman for his ruling.

Pension12

Hi and thanks once again for your reply.

As an analogy I see this situation as similar to the Sale of Goods Act, which guarantees a certain level of protection to consumers when an article (eg TV, phone, car etc) breaks soon after purchase but many manufacturers/retailers offer guarantees above and beyond this minimum protection, eg 7 year car warranties, free extended guarantees on electrical goods offered by John Lewis.

As you say there is always the ombudsman which is where this is likely to end up. That is why I am finding this exchange so helpful as it provides a valuable alternative viewpoint and allows me to develop and rehearse the case to be presented.

One question regarding the ombudsman which is will they still consider the case if the pension goes into payment before the case is taken to them?

xylophone

But suppose the article in question has three parts - the law gives an absolute lifetime guarantee on the twiddlenut, by which the manufacturer must abide but the bigglenut and the sigglenut are protected only by "merchantable quality" and such guarantee is purchased through an insurance scheme?

I would imagine that if a pension were in payment and the Ombudsman on consideration found that it had been underpaid, he could order some form of compensation but you would be best advised to check your situation for yourself.

xylophone

I have been looking at this document.

http://jbwm.co.uk/wp-content/uploads/2014/11/RETIREMENT_PLANNING.pdf

It has not been updated ( you will note the reference to RPI) and it does not cover the complexities of the lack of indexation where COD is greater than ASP.

However, it would appear that all S32 policies with GMP must follow the statutory pre88/post 88 rules.

I am wondering whether the ombudsman would uphold any decision not to pay increases in payment on pre 88 GMP regardless of what the policy might say on the basis that the policy wording cannot override a statutory requirement.

The only answer is to put the question before the ombudsman.