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Revaluation


In the distant past, when a member left a final salary scheme, the pension he had earned was frozen i.e. the amount of pension did not increase between the date of leaving and retirement.  This situation, however, has changed gradually over the years.

The first change was introduced in 1978 with the introduction of the State Earnings Related Pension Scheme (SERPS). Companies with final salary schemes could choose not to participate in SERPS. This process is known as contracting out.

Guaranteed Minimum Pension (GMP)

One of the requirements of contracting out is that the pension built up in the scheme, known as a Guaranteed Minimum Pension (GMP), has to be of a minimum level. When a member leaves a final salary scheme, all or part of the pension earned to that date will be made up of a GMP. The GMP element must be revalued for each complete tax year between the date of leaving the scheme and state retirement age.

There are three methods of revaluing the GMP:

  • Section 148 orders – This involves increasing the GMP in line with the annual rate of increase of National Average Earnings;
  • Fixed Revaluation – This is a rate of annual increase laid down, and periodically changed, by Government.  Revaluation rates are:
    • Left service between 6 April 1978 and 5 April 1988 - 8.5% per annum.
    • Between 6 April 1988 and 5 April 1993 – 7.5% per annum.
    • Between 6 April 1993 and 5 April 1997 – 7.0% per annum.
    • Between 6 April 1997 and 5 April 2002 – 6.25% per annum
    • Between 6 April 2002 and 5 April 2007 – 4.5% per annum.
    • After 5 April 2007 - 4% per annum
  • Limited Revaluation – Under this method the GMP is revalued in line with S148 Orders (see above) but only 5% per annum compound will come from the scheme while any balance will be paid by the State Scheme in return for a payment made by the trustees at the time of leaving.

It is for the trustees of each scheme to adopt whichever of the above three methods it wishes.

Pension in excess of the GMP

The increases above only apply to the GMP element and not to the rest of the preserved pension.  New rules were introduced for the non-GMP element in the 1980s and 1990s.

  • If a member left service after 31 December 1985, the pension in excess of the GMP built up after 31 December 1984 will be revalued.
  • If the member left service after 31 December 1990, all of the pension in excess of the GMP will be revalued.

The pension in excess of the GMP has to be revalued in line with the rate of increase in the Retail Price Index, subject to a maximum of 5% per annum compound for the period between the date of leaving and retirement.  From 6 April 2009, for those leaving service after this date, the revaluation rate will reduce to the Retail Price Index, subject to a maximum of 2.5% per annum.

None of these improvements required anything to be done for people who left service before the changes were implemented. However, many schemes chose to give discretionary increases to the preserved pension of those who left before the legislation came into effect.

Q & As

I left my pension scheme in 1976 with a pension of £210 a year. The trustees have told me it is still worth only £210. Surely this isn’t right.

When you left service, there were no laws in place forcing schemes to increase the pensions of those members who left service early. Your pension is therefore not subject to revaluation and is the same as it was when you left service.

I left my contracted in scheme in 1987 having completed over 20 years service. I have just come to retire and have been told only a small part of my pension has increased. How can this be?

As you left service between 1986 and 1991, only those benefits built up after 31 December 1984 have to be revalued. Any pension you built up before that date will not be revalued.

I’ve been told my pension has not revalued because I left service in 1972. Is there anything I can do to force my scheme to revalue my pension?

Unfortunately not. If the scheme did not adopt a rule allowing retrospective revaluation for those leaving service before 1986, there is nothing you can do.

My GMP revalues at 8.5% a year but I don’t receive any increases on the non-GMP. Why is that?

You probably left service between 1978 and 1986. If this is the case, only your GMP will be subject to revaluation. Revaluation for the non-GMP element came into force in 1986.

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