In the past, when a member left a final salary or career
average scheme, the pension 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 and career average 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 age 60
for women and age 65 for men.
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:
o Left service between 6 April 1978
and 5 April 1988 - 8.5% per annum.
o Between 6 April 1988 and 5 April
1993 - 7.5% per annum.
o Between 6 April 1993 and 5 April
1997 - 7.0% per annum.
o Between 6 April 1997 and 5 April
2002 - 6.25% per annum
o Between 6 April 2002 and 5 April
2007 - 4.5% per annum
o 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 revalues, between date of
leaving and retirement, in line with the rate of increase in the Consumer Price Index*
(CPI), subject to a maximum of:
- 5% per annum for benefits accrued before 6 April 2009;
and
- 2.5% per annum for benefits accrued on and after 6 April
2009.
* Note that prior to April 2011 the Retail Price Index (RPI)
figure was used instead of CPI.
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 & A's
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.
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.
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.
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.
