Guaranteed minimum pension (GMP) are a legacy of ‘contracting-out’ for members who were enrolled into defined benefit pension schemes between 6 April 1978 and 5 April 1997.
GMPs were a feature of the state earnings related pension (SERPS) that the Government introduced on 1978. Employers with defined benefit pension schemes were able to ‘contract-out’ their staff from SERPS, with both the employer and employee paying lower national insurance contributions. In exchange their defined benefit pension scheme was required to build up a GMP entitlement for members.
On the 5 April 1997 SERPS was reformed and renamed State Second Pension (S2P), whilst contacting out continued, GMPs ended at this date. Whilst ‘contacting-out’ was ended in April 2016 with the introduction of the New State Pension.
The importance of a GMP and pensions increase is that occupational pension schemes do not provide increases on the pre-88 GMP and only increase the post-88 GMP to a maximum of 3%. Prior to the introduction of the single tier state pension in 2016, the state pension would provide the increase for the pre-88 GMP as well as the excess over 3% on the post-88 GMP. The introduction of the New State Pension came with the decision to not provide increases on GMP’s that schemes do not provide.
Reconciliation and rectification
Following the end of contracting-out a program of GMP rectification began between HMRC and pension schemes to reconcile and rectification members recorded GMP amounts.
This can lead to members receiving notification of an overpayment of underpayment of their pension that has occurred as a result of their pension in retirement not increasing by the amount it should have.
If you’ve experienced this and have been overpaid pension read our How should I respond to a request for repayment of overpaid pension? member FAQ.
Equalisation
Equalisation of GMPs is an issue that has been known about since 1990 when the Barber judgement ruled that pensions are deferred pay and should not have an unequal pension age based upon gender. GMPs reflect state pension entitlement that for some members is based upon a state pension age that was different because of their gender.
The equalisation of GMPs has been in the news as a result of court cases to clarify what action needs to be taken by trustees. The recent legal action has provided clarity for trustees and we expect that once pension schemes have completed their reconciliation and rectification of GMPs, equalisation will be implemented in due course.
This equalisation could result in members receiving a slightly higher level of pension than they may have otherwise received.
Public sector pensions
The Government is consulting on the future indexation of guaranteed minimum pensions (GMPs) for those reaching state pension age after 6 April 2021. The government has been uprating GMPs for members of public sector pension schemes as an interim solution between 6 April 2016 and 5 April 2021.
The Government is consulting on the extension of full indexation only up to 5 April 2024, for a limited period after 5 April 2024 or indefinitely.
Prospect will be responding to the consultation on behalf of our members in public services sector before the consultation closes on the 30th December.
Our response will highlight our support for continued uprating of GMPs in all public sector pension schemes. As well as being mindful of the interests of our members in Section B of the BT pension scheme which has provisions for GMPs that make reference to the policy taken by the civil service pension scheme.