Over recent months there has been increasing comment in the media about issues relating to Guaranteed Minimum Pensions. Under the old State Pension, before 2016, there were two main components; a basic State Pension and a state earnings-related pension, commonly known as SERPS, later the State Second Pension. Some people, typically those with a defined benefit (or final salary) pension, may at some point in their career have been ‘contracted out’ of the State Second Pension. In return for giving up the right to a State Second Pension, employers and employees paid lower National Insurance contributions (NICs). Employers had to promise that the Company pension they provided would match the State Second Pension their employee would have received. This is known as the ‘Guaranteed Minimum Pension’, or GMP.
Issues have been identified by Her Majesty’s Revenue and Customs (HMRC) and the High Court which mean we must review all member records to ensure that the benefits being paid and/or accrued are correct. It is likely that there will be some members who have been receiving either over or under payments. However, due to the Plan’s strong financial position the Trustee, and the Company, have confirmed that in resolving these issues a) no member will be asked to repay any overpayments identified and b) no member’s pension will be reduced.
How did the GMP work?
GMP could be built up between 1978 and 1997. It’s important because HMRC uses this GMP calculation to work out how much State Pension you’re due. If you’ve been contracted out of the State Second Pension during your working life, the GMP is deducted from your State Pension entitlement to reflect the fact that you have paid less NICs and are due to get a higher private pension.
The first issue is that some of the records companies / HMRC hold on GMPs can date back decades and there can be errors in how it has been calculated. Consequently, HMRC has asked the administrators of pension schemes to check the records they hold against the information it holds, to see if they match up. We are currently undertaking a detailed exercise to do this and ensure that all members are receiving the correct amounts. Once we have completed this exercise, which will take some more time, we will contact anyone who has been affected.
You can check your State Pension forecast on www.gov.uk/check-state-pension. This will give you an indication of what your weekly payment is due to be and how much is being deducted if you were contracted out.
The other issue is GMP equalisation. In a recent case involving the Lloyds Bank pension schemes, the High Court made an important decision about pension benefits that will affect some Plan members.
The judgement concerns members who were contracted out of SERPS between 17 May 1990 and 5 April 1997. In return for being contracted out of this part of the State Scheme during this period, members built up a GMP in the Plan as explained above. During this period, the State Pension age (SPA) for men and women was different – 60 for women and 65 for men – which meant that both the State Pension and the GMP built up in the Plan were unequal between men and women because both were linked to SPA. The High Court decided that where someone had built up a GMP between 17 May 1990 and 5 April 1997, their overall Plan benefits must be made equal. Anyone who built up GMP in the Plan between these dates may be impacted by this legal development. However, some things are still uncertain as the Court may be asked to reconsider and/or review related questions about transfers out.
It will take the Trustee some time to investigate which Plan members will need to have their benefits adjusted, and the relevant calculations which are needed to equalise benefits must be carefully considered with the professional advisers – this is a complex process and will involve recalculating benefits for a significant number of members. Therefore, we are currently unable to confirm if your benefits will need to be amended in light of this ruling. We will contact those affected in due course. However, as stated earlier, both the Trustee and the Company have confirmed that a) no member will be asked to repay any overpayments identified and b) no member’s pension will be reduced.