No GMP indexation - really?

greenglide · 8 April 2018 at 1:27PM

Normally the scheme booklet would contain something like

your pension will be increased each year to help offset the effects of inflation:
!!!8226; Your GMP relating to service from 6 April 1988 will be increased with inflation up to 3% each year.
!!!8226; Your Plan pension in excess of your GMP will increase at a minimum of 3% per annum for that part accrued prior to 6 April 1997. The portion accrued between 6 April 1997 and 5 April 2006 will increase in line with the lower of the rise in the Retail Prices Index (RPI) and 5% per annum. The portion accrued from 6 April 2006 will increase in line with the lower of the RPI and 2.5% per annum.

The State no longer pays any increases to GMP after 6 April 2016.

The Trustee, in conjunction with the Company, will consider the award

The wording about the state paying towards the GMP used to say that indexation of the GMP, where appropriate, would be paid by the state along with the state pension.

The current wording in my scheme is flawed as the government continues to index the GMP for anyone whose SPa was before 6th April 2016!

xylophone · 8 April 2018 at 3:28PM

See this thread from post 21 onwards to see what happened under the old state pension system.

http://forums.moneysavingexpert.com/showthread.php?t=4532605&highlight=gmp+revaluation%20%20&page=2

You will note the difference between what happened with Full Rate/Fixed Rate revaluation - it was quite possible for there to be no index linking through the state pension mechanism for a very long time when FR was used.

After GMP age (60 F/65 M) the Scheme had no obligation to index link pre 88 GMP or post 88 GMP if the inflation index was 3% or under.

Under the new system, the old index linking system linking occupational schemes to state pension has disappeared.

As before, private Occupational Schemes will still pay no index linking on pre 88 GMP and will only index post 88 GMP to the extent that the inflation index is greater than 3%.

When do you become eligible for State Pension?

Have you obtained a State Pension Statement?

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

xylophone · 8 April 2018 at 3:34PM

House of Commons Library

BRIEFING PAPER
Number SN-05649, 2 February 2018

State Pension uprating -
2010 onwards

by Djuna Thurley

can be downloaded here

http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN05649#fullreport

woolly_wombat · 8 April 2018 at 8:02PM

http://www.thisismoney.co.uk/money/pensions/article-4187806/What-Guaranteed-Minimum-Pension-Steve-Webb-replies.html#comments

Steve Webb attempting to justify the loss of inflation-linked increases to the GMP that used to be paid via the state pension:

What happens to people with GMP who retire after April 2016?

In April 2016, the Government made big changes to the state pension. No-one any longer builds up rights under SERPS and there is no longer any contracting out.

So what happens to people retiring from April 2016 onwards is that a one-off calculation is done to see how much pension you have built up at that point.

Someone who has been extensively contracted out will just get the basic state pension figure.

And after that, the rather strange business of the state pension making up for some of the indexation - inflation-linked increases - that the occupational scheme never had to promise disappears.

There are two ways of looking at this.

One way would be to say that, taken in isolation, people in your situation have lost out on inflation-linked increases you would otherwise have had under the old rules.

The other way would be to focus on the opportunity for post 2016 service which will enable you to build your state pension beyond the £119 per week which is all someone who was fully contracted out could ever have got under the old rules.

Not great news for those who don't have time to build many additional years of state pension entitlement after April 2016.
.

Nomercer · 9 April 2018 at 11:08AM

Thanks everyone for the replies, excellent information that I need to understand, sorry I was offline yesterday. Here’s some further information as requested:
The £110k loss was estimated using the online annuity quote tool at moneyadviceservice.org.uk to establish the cost of an annuity to deliver my GMP (£6,502) at age 65 with and without index linking. The £110k is the difference between these two figures. So yes this quote is particular to my circumstances (63 year old healthy male) and my pension benefits (66% widows etc).
My pension documentation doesn’t mention anything to do with GMP (I have another DB pension from a different employer that is detailed in this respect so I’ve some idea of what it should look like!). I have asked the pension fund administrator to provide any relevant documentation they have but they have not responded to my requests over the last 3 months. I guess I will have to start down their complaints procedure to elicit a reply.
Regarding indexation, my pension documentation states pensions shall be adjusted “as if the rates of the increase specified in the Annual Review Orders issued in accordance with Section 2 of the Pensions (Increase) Act 1971 were applicable”.
Regarding the GMP revaluation method, that is an interesting question that’s not referenced at all in my documentation, I’ll have to ask pension fund administrator. I have a state pension forecast; with 38 years of NI contributions it looks OK to my untutored eye. I understand it was calculated under the old rules.

Dox · 9 April 2018 at 1:37PM

Nomercer wrote: »

The £110k loss was estimated using the online annuity quote tool at moneyadviceservice.org.uk to establish the cost of an annuity to deliver my GMP (£6,502) at age 65 with and without index linking. The £110k is the difference between these two figures. So yes this quote is particular to my circumstances (63 year old healthy male) and my pension benefits (66% widows etc).

The scheme will continue to provide your GMP, so the cost of buying an annuity from a commercial provider with/without index linking isn't what you've lost: you have 'lost' the income from index linking on £6,500 from age 65. Assuming 3% pa, that is approximately £200 a year. If you live until you are 90 (25 years) and ignoring compounding, that's £5,000 - more if you compound the increases (around £13,500), but in reality inflation may well drop below 3% (and yes, it could rise too, but I'm keeping the figures simple). Even allowing for this, there will still be a massive difference between your calculation of £110K and mine.

Nomercer · 9 April 2018 at 2:06PM

Dox, that's an interesting comparison. The incremental cost of index linking my pension via an annuity is say £110k; the benefit as you rightly show is say £13.5k. Can this discrepancy be explained by the pension funds allowing for a bout of high inflation and substantial increases in longevity?

Dox · 9 April 2018 at 2:12PM

Nomercer wrote: »

Dox, that's an interesting comparison. The incremental cost of index linking my pension via an annuity is say £110k; the benefit as you rightly show is say £13.5k. Can this discrepancy be explained by the pension funds allowing for a bout of high inflation and substantial increases in longevity?

Don't forget that an occupational scheme isn't run to make a profit from its members and the employer(s) concerned are on the hook for any shortfall if the fund starts to run dry. Scheme funding is reviewed at least once every 3 years and employer contributions amended to keep the fund healthy. The reviews (triennial valuations) take into account scheme-specific experience as well as general changes in mortality etc.

Annuity providers are commercial animals who build in a healthy profit margin and a very substantial 'risk' barrier to guard against someone living miles longer than mortality tables tell them they should! No employer is going to put their hand in their pocket and offer the provider a top up if they have underestimated the cost of providing the annuity.

I hope the figures make you feel a bit better, albeit still annoyed.

dampsquib · 10 April 2018 at 9:23PM

The idea of a GMP must have been a good idea when it was introduced, but now many pensioners seem to suffer from lower increases and inequality when their pension includes an element for GMP. As GMP still kicks in at 60 for women, they start to receive lower occupational pension rises than men of the same age, until men also become entitled to GMP at 65. There's a case going to court this year in an attempt to establish if this inequality needs to be tackled by pension schemes. The legal case was first mooted by the union at Lloyds, but I gather the union, Lloyds, and their pension scheme trustees are now jointly seeking a legal ruling.

Dox · 10 April 2018 at 9:37PM

GMP equalisation has been rumbling around for years but successive governments have made pronouncements about taking remedial action and then put it into the 'too difficult' pile. Any legal ruling will be more than a tad interesting!

What is often overlooked is the fact that (depending on how a particular scheme revalues the GMP) that the GMP element of a final salary pension revalues in deferment (i.e. the time between the member leaving active membership of the scheme and their pension coming into payment) at a higher rate than the rest of the pension. You never hear any mention of that when people start complaining they were 'missold' their pension, but given how technical the point is, that's no surprise - but you do wish the media, and indeed the schemes themselves, would ensure people had adequate information presented in a way they stand a sporting chance of understanding.

No GMP indexation - really?

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