Guaranteed Minimum Pension
Encyclopedia
The Guaranteed Minimum Pension (GMP) is the minimum pension which a United Kingdom
occupational pension scheme has to provide for those employees who were contracted out of the State Earnings-Related Pension Scheme
(SERPS) between 6 April 1978 and 5 April 1997. The amount is said to be 'broadly equivalent' to the amount the member would have received had they not been contracted out.
Originally, when the GMP became payable at State Pension Age, the cost-of-living increases associated with this element of a member's pension were paid by the state with the individual's state pension. With regard to any GMP accrued from 6 April 1988, the occupational pension scheme is required to pay increases in line with the Retail Price Index
up to a maximum of 3%. The change in rules led to a distinction between Pre 1988 GMP and Post 1988 GMP.
The system therefore became increasingly complex and can be illustrated with an example. Mr Jones was a member of his occupational pension scheme between 1980 and 1995 and was entitled to a pension of £500 per month on his retirement. Because he was contracted out of SERPS, the government advised that he was entitled to a GMP of £110 per month, including £50 post 1988 GMP. The non-GMP element of his pension—in this case £390 per month—is usually known as the 'excess' and his payment advice would give a breakdown as follows:
The complexity arises because different increases are applied to the various elements of the pension. Supposing the scheme rules allow for annual increases of 3% and the Retail Prices Index increases by 4.5%. The scheme would pay an additional £11.70 in respect of the excess pension (3% of £390), but nothing on the pre 1988 GMP. They would be liable to pay 3% of the post 1988 GMP - in this case £1.50 per month. The individual is, however, entitled to an increase of 4.5% on his total Guaranteed Minimum Pension, which amounts to £4.95 (4.5% of £110). Therefore, an additional amount of £3.45 would be paid with his State Pension (£4.95 less £1.50).
With effect from 6 April 1997, Guaranteed Minimum Pensions no longer accrued and the system was replaced by the Reference Scheme Test. However, schemes were still liable to pay GMP for those members who had accrued it between 1978 and 1997.
Additionally some contracted out schemes whose pensions may have been based only on basic pay may have a GMP for 1978-1997 that is actually higher than the company pension for that period. In this case the company must pay the higher of company pension or GMP for 1978-97 PLUS any scheme pension accumulated after that date.
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
occupational pension scheme has to provide for those employees who were contracted out of the State Earnings-Related Pension Scheme
State Earnings-Related Pension Scheme
The State Earnings Related Pension Scheme was a UK Government pension arrangement, to which employees and employers contributed between 6 April 1978 and 5 April 2002, when it was replaced by the State Second Pension....
(SERPS) between 6 April 1978 and 5 April 1997. The amount is said to be 'broadly equivalent' to the amount the member would have received had they not been contracted out.
Originally, when the GMP became payable at State Pension Age, the cost-of-living increases associated with this element of a member's pension were paid by the state with the individual's state pension. With regard to any GMP accrued from 6 April 1988, the occupational pension scheme is required to pay increases in line with the Retail Price Index
Consumer Price Index (United Kingdom)
The Consumer Price Index is the official measure of inflation of consumer prices of the United Kingdom. It is also called the Harmonised Index of Consumer Prices .-History:...
up to a maximum of 3%. The change in rules led to a distinction between Pre 1988 GMP and Post 1988 GMP.
The system therefore became increasingly complex and can be illustrated with an example. Mr Jones was a member of his occupational pension scheme between 1980 and 1995 and was entitled to a pension of £500 per month on his retirement. Because he was contracted out of SERPS, the government advised that he was entitled to a GMP of £110 per month, including £50 post 1988 GMP. The non-GMP element of his pension—in this case £390 per month—is usually known as the 'excess' and his payment advice would give a breakdown as follows:
| Excess Pension | £390 |
| Pre-1988 GMP | £60 |
| Post-1988 GMP | £50 |
The complexity arises because different increases are applied to the various elements of the pension. Supposing the scheme rules allow for annual increases of 3% and the Retail Prices Index increases by 4.5%. The scheme would pay an additional £11.70 in respect of the excess pension (3% of £390), but nothing on the pre 1988 GMP. They would be liable to pay 3% of the post 1988 GMP - in this case £1.50 per month. The individual is, however, entitled to an increase of 4.5% on his total Guaranteed Minimum Pension, which amounts to £4.95 (4.5% of £110). Therefore, an additional amount of £3.45 would be paid with his State Pension (£4.95 less £1.50).
| Previous Year | Increase (from Scheme) | Increase (from State) | New Pension | |
|---|---|---|---|---|
| Excess | £390 | £11.70 | £0 | £401.70 |
| Pre 1988 GMP | £60 | £0 | £2.70 | £62.70 |
| Post 1988 GMP | £50 | £1.50 | £0.75 | £52.25 |
| Total | £500 | £13.20 | £3.45 | £516.65 |
With effect from 6 April 1997, Guaranteed Minimum Pensions no longer accrued and the system was replaced by the Reference Scheme Test. However, schemes were still liable to pay GMP for those members who had accrued it between 1978 and 1997.
Additionally some contracted out schemes whose pensions may have been based only on basic pay may have a GMP for 1978-1997 that is actually higher than the company pension for that period. In this case the company must pay the higher of company pension or GMP for 1978-97 PLUS any scheme pension accumulated after that date.
External links
- Pensions Schemes Act 1993
- House of Commons Library - Guaranteed Minimum Pension – annual increases
- Occupational Pension Schemes (Contracting-Out) (Amendment) Regulations 2009
- The Pensions Advisory ServiceThe Pensions Advisory ServiceThe Pensions Advisory Service is a UK non-departmental public body and independent non-profit organisation which provides free information, advice and guidance on the whole spectrum of pensions, covering state, company and individual schemes...
- Final Salary Schemes - Revaluation