The real impact of GMP

weaswan

I am a male who draws on a number of company defined benefit pensions.

I have just received notification from one pension plan that they have completed GMP conversion.  The statement they have sent me splits my current pension between that earnt before Apr 97 and that earnt after.

For the pension earned after Apr 97 there is no change.

For the pension earned before Apr 97 there is no change to the current pension but there is a change to future indexation.  Prior to this GMP conversion this element of the pension was indexed by RPI upto max 5%.  Now that portion of the pension has been split approximetely 50:50 with about half being subject to no indexation and half subject to a fixed 5% indexation.  Roughly I think this means about a fixed 2.5% increase in future.  

Whilst the notification letter makes play of 'your current pension will ether remain the same or increase' to me this has changed the risk profile of my income going forward.  Indeed it seems pretty clear in the current inflation environment the new method of calculation is going to reduce my real income as certainly in the next 12 months inflation at 2.5 % seems unlikely.  And although inflation has been low for say 20 years before that it was much higher.  So now I am subject to a different risk profile.  No one really knows what will happen in the future but it is clear, at the point of conversion, I will be worse off in the immediate future.  I happen to believe inflation will be stubborn and not come down.

First question I'm guessing this is nothing to do with GMP?

But 'simplfying plans pension increase' which the plan has done at the same time.  I don't really buy that simplifying pension increases (because of the six different indexes to apply to various schemes) makes much difference to the pension scheme as it must be so easy to calculate these with automation.  Sceptically I'm thinking the pension scheme has reduced its future liability and risk profile.

Welcome comments.          

xylophone

Is this the first pension increase after your 65th birthday?

 If so, regarding the pension to which you refer, are you sure that the "split" to which you refer relates to GMP conversion?

Or is it rather that after age 65, the pension is split into its component pre 88 GMP/post 88 GMP/excess?

The pre 88 receives no increase from the scheme, the post 88 receives an increase up to 3% CPI from the scheme and the balance increases according to scheme rules?

If so, this  was the  standard position for non public service DB Schemes.

Have you obtained a state pension forecast?

Marcon

weaswan said:

I am a male who draws on a number of company defined benefit pensions.

I have just received notification from one pension plan that they have completed GMP conversion.  The statement they have sent me splits my current pension between that earnt before Apr 97 and that earnt after.

For the pension earned after Apr 97 there is no change.

For the pension earned before Apr 97 there is no change to the current pension but there is a change to future indexation.  Prior to this GMP conversion this element of the pension was indexed by RPI upto max 5%.  Now that portion of the pension has been split approximetely 50:50 with about half being subject to no indexation and half subject to a fixed 5% indexation.  Roughly I think this means about a fixed 2.5% increase in future.  

Whilst the notification letter makes play of 'your current pension will ether remain the same or increase' to me this has changed the risk profile of my income going forward.  Indeed it seems pretty clear in the current inflation environment the new method of calculation is going to reduce my real income as certainly in the next 12 months inflation at 2.5 % seems unlikely.  And although inflation has been low for say 20 years before that it was much higher.  So now I am subject to a different risk profile.  No one really knows what will happen in the future but it is clear, at the point of conversion, I will be worse off in the immediate future.  I happen to believe inflation will be stubborn and not come down.

First question I'm guessing this is nothing to do with GMP?

But 'simplfying plans pension increase' which the plan has done at the same time.  I don't really buy that simplifying pension increases (because of the six different indexes to apply to various schemes) makes much difference to the pension scheme as it must be so easy to calculate these with automation.  Sceptically I'm thinking the pension scheme has reduced its future liability and risk profile.

Welcome comments.          

Go back and make that point to the trustees and ask for their comments. I think you could find it's not quite the picture you fear.

xylophone

And have you obtained a state pension forecast?

https://www.gov.uk/check-state-pension

weaswan

xylophone said:

Is this the first pension increase after your 65th birthday?

 If so, regarding the pension to which you refer, are you sure that the "split" to which you refer relates to GMP conversion?

Or is it rather that after age 65, the pension is split into its component pre 88 GMP/post 88 GMP/excess?

The pre 88 receives no increase from the scheme, the post 88 receives an increase up to 3% CPI from the scheme and the balance increases according to scheme rules?

If so, this  was the  standard position for non public service DB Schemes.

Have you obtained a state pension forecast?

Thanks for your response.  

Responding to your queries:

I am not yet 65 and the communication from the Pension Plan wasn't about a specific current pension increase.  It was about changes to how future pension increases will be calculated.

No I'm not certain this is caused by GMP conversion.  The letter states that two things have happened 'GMP conversion' and 'simplifying the Plan's pension increases'.  Having read the letter I'm now guessing the impact I've described is due to the 'simplyfying the pension increases' but that's a guess because its a single table summary covering both GMP and the simplification.

This is not pre 88.  I have no benefits from that period.  The period impacted is pre Apr 97.

Thanks for the tip about checking state pension forecast - that has raised some queries too - but I'll look at that separately.   I'm assuming that doesn't impact on this?  

xylophone

You mention that you  are drawing on a number of DB Pensions.

 You are under state pension age. Are you currently fully retired with no earned income? 

What exactly does your SP forecast show and what is your COPE (second page of forecast)?

When do you reach SPA?



With regard to the DB pension under discussion, was this a deferred pension that you started to draw after scheme pension age?

Or a deferred pension that you started to draw at the earliest age scheme/statutory rules allowed?

Is the case that since you started to draw the pension, it has simply increased annually by CPI/RPI up to 5%?

You were a member of the scheme post 1988 and post 1997 - which years exactly?

The significance of 1997 is that from 6/4/97, the Guaranteed Minimum Pension system ( introduced 1978, under which  a contracted out DB scheme was required to guarantee a pension at least as great as members would have accrued had  they been contracted in) came to an end.

See here https://techzone.abrdn.com/public/pensions/Tech-guide-guaranteed-min-pen

You will note that GMP age for women was (and remains) 60 while for men it was (and remains) 65.

Scheme members who had taken benefits would usually find that up to  GMP age, the pension would increase annually under whatever percentage was specified under scheme rules.

Thereafter, the pension was split into its component pre 88/post 88/excess and increased as explained in my previous.


It appears that the Trustees of your scheme (who were poked into action as a result of a court ruling around five years back)

have decided to equalise GMPs through a conversion method?

https://www.gov.uk/guidance/guaranteed-minimum-pension-gmp-conversion-and-equalisation

https://www.plsa.co.uk/Portals/0/Documents/Made-Simple-Guides/2020/GMP-equalisation-Made-Simple-June-2020.pdf