Guaranteed Minimum Pension

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:

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. [1]

References

The example shown is a bad example because they have chosen 3% increase in the company scheme. This is confusing because the limit to which GMP will follow RPI is 3%. If the company scheme allowed an increase in line with CPI, e.g. 4.2%, there would be more clarity in the explanation.

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