DB pension and GMP

Sterlingtimes

At age 60 in 2016 my pension is GMP £534.04, Excess £7,950.40, Total £8,485.44
The day before my 65th birthday in February, I am receiving: 
GMP £534.04, Excess £8,777.96, Total £9,312.00 (the excess is correctly inflated by CPI)
On the day of my 65th birthday, my pension is revalued as follows:
GMP £1,907.36, Excess £7,992.88, Total £9,900.24.
The GMP is correctly calculated using a compound interest of 6.25% per year since my deferment.
But why is the Excess reduced from £8,777.96 to £7,992.88? I cannot get an answer on this in terms that I understand. I had not expected the Excess to reduce.
Is the reduction likely to be a calculation to bring my pension back to 1/55 per year of final salary? An Excess £9,690.41 would achieve this. Am I compensated for the five years from age 60 to age 65 when my pension has paid less than 1/55 per year of final salary (because the GMP remains uninflated)?

Marcon

Sounds as if you've been receiving something known as a 'bridging pension'. Did those words feature anywhere in the 'explanation' you have been given by the scheme?

Bridging pensions are paid where a member retires before State Pension Age (or GMP age, which is still 65 for men) to ensure that they receive a relatively 'smooth' level of pension from the date they retire to the date when SPA and/of GMP kicks in.

xylophone

Have a look at this post and the calculation from WTW

https://forums.moneysavingexpert.com/discussion/comment/63406494/#Comment_63406494

*Increases to Mr Floutier’s pension since Normal Retirement Date are offset against his GMP revaluation; therefore, Mr Floutier’s non-GMP portion reverts to the value at age 60. 

And here
https://forums.moneysavingexpert.com/discussion/5865725/gmp-and-deferred-pension/p1

Between your retirement date and your GMP payment age (65), your Total Pension is increased in line with the Retail Price Index (RPI) capped at 5% each October.
Upon reaching age 65, your GMP is incorporated into the total value of your pension and is not added on top. Therefore, your pension is split into three sections, and increased as follows:
Non-GMP (increased in line with RPI capped at 5% each October)
Pre 1988 GMP (no increases applied by the Scheme)
Post 1988 GMP (increased in line with CPI capped at 3% each April)
Total Pension as at 65
I appreciate that it may appear that your excess value is being reduced to incorporate your GMP into your pension. However, your GMP value is already included in your Total Pension when you retire but can only be broken down, as shown above, upon reaching age 65.

Does this resemble the explanation you have been given?

hyubh

Sterlingtimes said:

At age 60 in 2016 my pension is GMP £534.04, Excess £7,950.40, Total £8,485.44
The day before my 65th birthday in February, I am receiving: 
GMP £534.04, Excess £8,777.96, Total £9,312.00 (the excess is correctly inflated by CPI)
On the day of my 65th birthday, my pension is revalued as follows:
GMP £1,907.36, Excess £7,992.88, Total £9,900.24.
The GMP is correctly calculated using a compound interest of 6.25% per year since my deferment.
But why is the Excess reduced from £8,777.96 to £7,992.88? 

Caveat - this is ultimately only a guess since how exactly GMP is treated before it is due is down to individual scheme rules. However...

• £534.04 is presumably the GMP on leaving in the late 90s (GMP revalues from exit to GMP age by the number of complete tax years, a fixed rate of 6.25% applied to leavers 97-02, and £534.04 x 1.0625^21 = £1,907.57).
• Technically the GMP/excess split is taken on leaving with each component then having it's own minimum revaluation method (statutory excess revaluation is inflation capped - for you - to 5%, though with a slightly funky lookup that works on complete calendar years; this will be slightly different to how your excess is increased once in payment, even if the latter is inflation based too).
• Since you retired (i.e. started drawing your pension) before your GMP age (65), I'd guess the total pension on leaving was revalued using excess revaluation to age 60 then the GMP/excess split 'retaken' (i.e. 'excess' on retirement = revalued total pension - GMP at exit).
• This 'excess' was then increased to age 65 with the 'GMP' non-increasing (although, it is actually revaluing behind the schemes... saying the GMP was still only £534.04 at age 60-64 doesn't really mean anything, the scheme could have considered it zero for payment purposes if it wanted to)
• At age 65 the original GMP/excess split, with their respective values at exit revalued using their respective revaluation rates, was restored.
• Or more exactly: the GMP was now the GMP at exit revalued to GMP age (i.e. using the formula above), the excess the excess at leaving revalued to retirement (age 60) then increased to age 65.

I should restate, this is just a potential explanation. The fact the majority of your pension is pre-97 excess specifically gave the scheme maximum flexibility on how to treat it once in payment, and it is possible your pre- and post-97 excess (beyond revaluation) is/has been treated differently (while both pre- and post-97 excess is subject to the same statutory minimum revaluation, a legal requirement to increase once in payment only applies to post-97 excess).

Sterlingtimes

xylophone said:

Have a look at this post and the calculation from WTW

https://forums.moneysavingexpert.com/discussion/comment/63406494/#Comment_63406494

*Increases to Mr Floutier’s pension since Normal Retirement Date are offset against his GMP revaluation; therefore, Mr Floutier’s non-GMP portion reverts to the value at age 60. 

And here
https://forums.moneysavingexpert.com/discussion/5865725/gmp-and-deferred-pension/p1

Between your retirement date and your GMP payment age (65), your Total Pension is increased in line with the Retail Price Index (RPI) capped at 5% each October.
Upon reaching age 65, your GMP is incorporated into the total value of your pension and is not added on top. Therefore, your pension is split into three sections, and increased as follows:
Non-GMP (increased in line with RPI capped at 5% each October)
Pre 1988 GMP (no increases applied by the Scheme)
Post 1988 GMP (increased in line with CPI capped at 3% each April)
Total Pension as at 65
I appreciate that it may appear that your excess value is being reduced to incorporate your GMP into your pension. However, your GMP value is already included in your Total Pension when you retire but can only be broken down, as shown above, upon reaching age 65.

Does this resemble the explanation you have been given?

Thank you so much, xylophone, the Floutier case is a virtual replica of my own. I was told by the pension administrator that I would receive no step at the age of 65. After a lot of Googling and much anguish, I requested that the pension administrator reconsidered my position. They told me that they were in error and that I would receive a step-up.

The problem is I think that the administrators use a computer model and cannot explain to me the underlying rationale.

The situation is exactly as you describe. I effectively take my excess at age 60 (£7,950.40) and add to it my inflated GMP at 65 (£1,907.36) giving me £9,857.76. In fact, their calculation is £9,900.24, a difference of merely £41.48.

Anyway, that is good enough for me. My mind is now at rest. Thank you again. I am very grateful.

Sterlingtimes

Thank you, hyubh, xylophone got in there first but your posting consolidates matters and reaffirms the earlier posting.
I am very pleased with your response. It has helped me a lot.

Sterlingtimes

I have now seen the real calculation. This may be helpful to others in the future.

At age 60 my pension was

Pre 1997 excess £5,771.09
Post 1998 GMP £534.04
Post 1997 £1,975.83

My pension at GMP age (male 65) is

Pre 1997 excess £5,771.13 (the same as the age 60 figure above within a few pence with no inflation applied)
Post 1998 GMP £1,907.36 (this is the correct number within a few pence £534.04 times 1.0625 to the power of 21)
Post 1997 £2,221,75 (the same as the age 60 figure above with the RPI applied for 5 years)