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1.7 Contracting-Out - Guaranteed Minimum Pension (GMP)

1.7.1 

GMP accrued between April 1978 and April 1997

GMP is equivalent to the pension that an employee would have earned under the State Earnings Related Pension Scheme had the member not contracted out via his or her company’s salary-related scheme between 6 April 1978 and 5 April 1997. That is, GMP was the minimum pension benefit a Defined Benefit scheme was required to provide an individual who was in contracted-out employment via the scheme between 6 April 1978 and 5 April 1997. On 6 April 1997, GMP ceased to accrue. [See 1.6.1]

Between April 1978 and November 1986, COSRS were also expected to meet a ‘requisite benefits’ test, confirming that the scheme provided a minimum accrual rate of one-eightieth of ‘relevant earnings’ for each year of contracted-out service. This was a supplementary test additional to the GMP requirement.

Note 

GMP accrued prior to 6 April 1997 continues to be revalued by the scheme after 6 April 1997 to State Pension Age (or date of leaving service, or date of death, if earlier).

[For Reference Scheme Test see 1.9 and 1.19.5]

COSRS

Contracted-Out Salary-Related Scheme 

Contracted-out schemes must provide widow’s/widower’s pensions of at least one-half of the member’s accrued GMP.

1.7.2 

Post-1997 COSR rights

Effective 6 April 1997, instead of providing GMP, COSRS have been expected to provide benefits broadly equivalent to, or greater than, benefits provided by a Reference Scheme Test [see 1.9]. These benefits are known as post-97 COSRS rights.

1.7.3 

GMP was based on Relevant Earnings [see 1.2.6].

Table   See STATE PENSIONS, RATES (columns headed SERPS/GMP)

Note 

The Pensions Act 1993 set out how GMP was to be calculated. The Accrued GMP Liability Service (AGLS), part of HMRC, provides details of accrued GMP based on an individual’s contributions/earnings information. Alternatively GMP and/or contributions equivalent premium calculations could be requested from HMRC via the appropriate form, obtainable from HMRC’s website.

1.7.4 

Guaranteed Minimum Pension earned for contracted-out periods between 6 April 1978 and 5 April 1997 does not become payable before age 65 (men) or 60 (women born before April 1950), and will continue to be paid at these ages even when the State Pension Age rises [see 1.1.7].

1.7.5 

Revaluation of GMP

GMP in respect of members who left a contracted-out Defined Benefit scheme before attaining State Pension Age (and who received a deferred pension including GMP on leaving), is revalued from date of termination of contracted-out service up to State Pension Age.

It is important to ensure that scheme GMP records are reconciled with HMRC GMP records. Reconciliation is expected to occur automatically when
(i)   a scheme has ceased to contract-out,
(ii) winding up proceeds,
(iii) a scheme enters into a Pension Protection Fund assessment period [see 16.10.5] or
(iv) it becomes closed to future accrual.

Note 

Since April 1997, two methods of revaluing GMP between date of leaving service and State Pension Age have continued to be available to schemes:

(i) Full rate in line with Section 148 orders:

orders approved each year by Parliament.

(ii) Fixed Rate Revaluation:

8.5% p.a. compound for leavers before 6 April 1988

7.5% p.a. for leavers between 6 April 1988 and 6 April 1993

7.0% p.a. for leavers after 6 April 1993

6.25% p.a. for leavers after 6 April 1997

4.50% p.a. for leavers after 6 April 2002

4.0% p.a. for leavers after 6 April 2007

4.75% p.a. for leavers between 6 April 2012 and 5 April 2017.

(iii) Two earlier (pre-1997) alternative ways of preserving contracted-out benefits existed: either to buy the rights of early leavers back into the State scheme through paying a CEP, or to discharge the liability by making a transfer payment to another contracted-out pension arrangement at the request of the member. 

Tables   See CONTRACTING OUT, SECTION 148/SECTION 21 ORDERS

              See CONTRACTING OUT, FIXED-RATE GMP REVALUATION

1.7.6 

GMP conversion

Since 6 April 2006, trustees have been able (subject to their Rules) to convert GMP into a lump sum (or serious ill-health lump sum) [see 24.5.6]. Also, trustees may convert GMP (and Safeguarded Rights [see 17.2.3 (Note)]) into ordinary scheme benefits at a chosen date (being the date on which the rule amendment takes place) and from that date, GMP will cease to exist as it will be deemed to be scheme benefits. There is no formal clearance procedure for GMP conversions, providing legislative requirements are met, including consulting with members in advance of conversion.NOTE: As before, failure to consult will not, however, affect the validity of the change made.

Note 

GMP conversion is an option; no scheme is obliged to convert GMP.

Each member’s post-conversion benefit would be required to be at least as ‘actuarially valuable’ as their rights immediately prior to conversion.

Note: Trustees are expected to ensure they seek and discuss actuarial advice as necessary in order to determine how ‘actuarial equivalence’ can be established.

Converting GMP might enable the scheme to adopt a ‘unified and streamlined’ benefit structure, helping members to understand better their general pension rights and also when transferring their benefits [see 17.2.5]. Administrative savings might also be gained.

NOTE: Trustees are expected to ensure they seek and discuss actuarial advice as necessary in order to determine how actuarial equivalence can be achieved. It is for the trustees and the employer to decide what benefits should be offered to replace GMP benefits. The actuary will then advise a method of converting current rights into new scheme benefits. 

Conversion of GMP will not be allowed to lead to a reduction of pension in payment and ‘conversion benefits’ may not include money purchase benefits (but should include a certain minimum of dependant's benefits). Members and those in receipt of pension will need to be consulted. HMRC would also need to be informed about benefits converted. Failure to observe such conversion requirements and notifications may lead to the conversion being judged void by the Pensions Regulator and/or a penalty imposed.

1.7.7 

Trustees may also, subject to the consent of the member and the scheme's rules:

  (a)  transfer GMP (or pension converted) to another contracted-out occupational pension scheme or to a personal pension on leaving service or on winding up
  (b)  buy out GMP (or pension converted) via individual insurance policies.
  It is possible for a scheme to mix or extend the above methods – see also 1.9.1 (Note).
Note 

[But see 17.3.3]

1.7.8 

Annual increases to GMP 

GMP accrued after 6 April 1988 and before 6 April 1997 (when it ceased to accrue) has to be increased in payment by the scheme at the rate of 3% per annum or RPI if less [but see 24.3.32].

GMP accrued before 1988 is increased in payment wholly by the State (i.e. is not subject to statutory annual increases paid via the scheme).

The revaluation of ordinary scheme benefits provided in lieu of GMP after it has been converted [see 1.7.6] will be decided by the scheme’s rules.

Table    See CONTRACTING OUT, POST-1988 GMP INCREASE ORDERS

1.7.9  Commutation of GMP – see 24.3.17.
1.7.10 

GMP equalisation

GMP continues to be based on State Pension Ages for men and women of 65 and 60 respectively [see 1.1.7(a)–(c) and 10.3.8 (Note)]. In January 2010, the Government indicated that it intended, Parliamentary time permitting, to legislate to equalise GMP. The DWP has since confirmed this intention, in its response to consultation on GMP equalisation. Statutory guidance is anticipated also covering the conversion of GMP into ordinary benefits.

Note 

In the meantime schemes should take steps to equalise differences resulting from different State Pension Ages in respect of GMP.










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