Consultation outcome

Government response: Guaranteed Minimum Pension Fixed Rate Revaluation

Updated 21 February 2022

Ministerial foreword

Millions of people in the UK will receive a Guaranteed Minimum Pension as a part of their occupational pension. When an individual leaves a pension scheme early, it is extremely important that the value of the pension they have built up gets some protection from inflation.

As people tend to move jobs more frequently during their working lives than they may have done in the past, it has become increasingly important that occupational pension rights built up in one period of employment are protected after a person has left a pension scheme early. There can be many years between a person ceasing to contribute to a particular occupational pension scheme and that person being eligible to take that pension. Without revaluation to mitigate the effects of inflation, the value of a pension can be significantly eroded over time. What looked like a good foundation for a retirement income 30 years ago would look a lot less generous after decades of inflation, even at times when inflation has been consistently low by historic standards.

Ensuring that Guaranteed Minimum Pensions for people who leave their pension schemes early receive a rate of revaluation which takes into account this erosion in value caused by inflation over time is therefore crucial. This will help to ensure that the hard work people put in is rewarded by having the value of their future retirement income protected. Equally, however, it is right that GMPs paid as part of an occupational pension are not subject to unreasonably high rates of revaluation which might reward those members with a Guaranteed Minimum Pension more generously than those without, and might put the funding of the scheme and affordability for the sponsoring employer under unwarranted pressure

We review and consult on the rate of revaluation which must be applied to those schemes that use the fixed rate revaluation method to increase Guaranteed Minimum Pensions to ensure it remains appropriate. A review and consultation every five years ensures that the industry and individuals have an opportunity to consider the process in the round, and to allow the Government to reflect on any views they may have in the light of the evolving economic position, and the pensions landscape.

Accordingly, this summer, the Government commissioned a review of the rate of revaluation which must be applied to those schemes that use the fixed rate revaluation method to increase Guaranteed Minimum Pensions.

Following advice from the Government Actuary’s Department this consultation proposed a change in the rate from 3.5% per annum to 3.25% per annum for those leaving their scheme between 6 April 2022 to 5 April 2027. I believe that this amended rate reflects current trends in inflation and wage growth and succeeds in balancing the needs of all members of affected occupational pension schemes. More detail on the rationale for changing the rate is included at paragraphs 31 to 34 of this document.

I am now pleased to publish a Government response to the consultation, outlining final decisions on a change in the rate of fixed rate revaluation and discussing respondents’ views. The very small number of responses received suggests that the vast majority of the pensions industry agreed with my Department’s approach.

Guy Opperman MP
Minister for Financial Inclusion

Chapter One: Introduction

1. Guaranteed Minimum Pensions (GMPs) are the minimum pension that an occupational pension scheme, contracted out of the additional State Pension between 6 April 1978 and 5 April 1997 on a salary related basis, has to provide to its members. The amount ensures that members receive a broadly similar amount of occupational pension income in retirement as they would have done had they not been contracted-out.

2. If a member of a scheme ceases to be an active member of that scheme before they are eligible to receive their GMP, the GMP must be revalued to provide a measure of protection against inflation. Some occupational pension schemes with a GMP element revalue the GMP using a fixed rate method, whereby the rate of revaluation is set in law by the Government.

3. On 23 September 2021 the Department for Work and Pensions (DWP) published a consultation which sought views on a proposed change in the rate of fixed rate revaluation. The consultation ended on 18 November 2021. The consultation document is available on the GOV.UK website.

4. The consultation recommended that the rate be changed from 3.5% per annum to 3.25% per annum.

5. This document provides a high-level summary of the consultation responses along with the Government’s response.

6. Regulations which have been made as a result of the review of the rate of fixed rate revaluation are available on the UK Legislation website: The Occupational Pension Schemes (Schemes that were Contracted-out) (No. 2) (Amendment) Regulations 2022.

Executive Summary of responses

7. We received two written responses, one from a private individual, one from a representative of the pensions industry body. We are grateful to those who replied. The names of the respondents are set out in Annex A.

8. We are assuming that the low level of interest in this consultation is indicative of a general agreement that the proposed new rate of revaluation for the Fixed Rate Revaluation for GMPs is appropriate.

9. Question 1 sought views on a proposed fixed rate of revaluation of 3.25% per annum, to be applied where applicable from 6 April 2022.

10. One respondent argued that this rate was too high, on the grounds that a lower rate of fixed rate revaluation would be in the interests of members of money purchase schemes with GMPs that are subject to Fixed Rate Revaluation.

11. The other respondent had no views as to the proposed rate itself, but expressed a desire to see any change in the rate communicated to pension schemes and their administrators well in advance of 6 April 2022.

12. Question 2 asked whether we should adopt a short to medium term view on inflation and real earnings growth when considering the appropriate rate of fixed rate revaluation.

13. One respondent agreed that this approach is correct. The other respondent did not consider this question was within their remit.

14. Question 3 asked whether we should continue to exclude the additional 0.5% per annum premium which DWP used to apply to the rate of revaluation set for Fixed Rate Revaluation for GMPs.

15. One respondent agreed that the 0.5% per annum premium should be excluded. The other respondent did not consider this question within their remit.

How we consulted and how people responded

16. The Consultation document available on GOV.UK ran from 23 September 2021 to 18 November 2021. A dedicated email address was open to responses from individuals, the pension industry and other stakeholders.

Public sector equality duty

17. The Department’s policies, guidance and procedures aim to ensure that any decisions, new policies or policy changes do not discriminate unlawfully against anyone, and that in formulating them the Department has taken due regard to its obligations under the Equality Act 2010 and the Public Sector Equality Duty.

18. While there are disparities within GMPs (which are being addressed through equalisation) GMP increases themselves are applied using the same percentage for everyone, and we therefore do not believe that there is an adverse impact on any of the groups with protected characteristics.

Quality assurance

19. This Consultation was carried out in accordance with the Government’s Consultation Principles.

Chapter Two: Fixed Rate Revaluation for Guaranteed Minimum Pensions

Guaranteed Minimum Pensions

20. Between 6 April 1978 and 5 April 1997, employers sponsoring salary-related occupational pension schemes could ‘contract out’ their employees from the additional State Pension through membership of the employer’s scheme, provided the scheme took on the responsibility for paying a GMP, from age 60 for women or 65 for men.

21. On reaching this age, members would generally have built up a GMP of a broadly similar amount to the additional State Pension to which they would otherwise have been entitled, had they stayed in the State system.

22. Where a member of a formerly contracted out pension scheme leaves the scheme before pensionable age (known as a deferred member), the scheme must revalue their GMP to when it becomes payable at pensionable age.

23. There are three alternative ways of revaluing GMPs, and schemes can choose which method to use. Some schemes have chosen to revalue GMPs using the fixed rate method, whereby the GMP is revalued by a fixed rate of revaluation provided for in legislation.

Fixed Rate Revaluation

24. The pensionable age for a GMP is set at 60 for a woman and 65 for a man. When a member of a contracted out pension scheme leaves employment before the age the GMP can be taken, the scheme has a statutory duty under section 16 of the Pension Schemes Act 1993 to revalue the amount of GMP which is due to the member until the GMP may be taken, to protect the buying power of a member’s pension.

25. Some occupational pension schemes use the fixed rate revaluation method to do this. Under the fixed rate revaluation method, the Department for Work and Pensions (DWP) sets the rate which schemes must use to revalue deferred members’ GMPs each year. Because the rate is fixed in law, the fixed rate method gives pension schemes greater certainty about what their future liabilities will be.

26. The rate that will be applied to those leaving their pensionable service over the next five years is reviewed and updated by DWP to ensure that it continues to reflect trends in inflation and wage growth.

27. A review was therefore carried out in summer 2021.

28. The current rate of fixed rate revaluation is 3.5% per annum. This has been in place since 2017.

29. In line with previous reviews, we have sought advice from the Government Actuary’s Department (GAD) on whether the current rate of revaluation applied to fixed rate revalued GMPs remained appropriate.

The proposed change to the rate of fixed rate revaluation

30. GAD indicated that a new fixed rate of revaluation of between 3% per annum and 3.5% per annum for those leaving pensionable service during the period 6 April 2022 to 5 April 2027 is a more appropriate range given current trends in inflation and wage growth.

31. GAD recommended that DWP consult on a specific rate of 3.25% per annum, which they have advised is reasonable as a mid-point of the proposed range.

32. GAD’s figure is based on projected average earnings increases over the next 7.5 years, without any explicit allowance for the higher pay increases reported over the last year. GAD has reduced the period on which the earnings increases are based from 10 years, as used in their previous review, to 7.5 years. This reflects the fact that many occupational pension schemes have matured and that members with GMPs are now much closer to the age at which they will receive them than at the last review five years ago.

33. The proposed move from 3.5% per annum to 3.25% per annum reflects a long term reduction in the rate of revaluation applied to fixed rate revaluation GMPs. In the period 1978 to 1988, the rate of fixed rate revaluation was set at 8% per annum. This had fallen to 4.5% per annum in the period 2002 to 2007.

Business burdens and regulatory impact

34. The change in rate proposed by GAD means that schemes using the fixed rate method would see a 0.25% per annum reduction in the rate of revaluation they need to apply to the relevant GMPs - a small saving. Conversely, members whose GMPs are revalued using a fixed rate method who leave their scheme on or after 6 April 2022 will see a 0.25% per annum smaller increase in their GMP benefits, compared to what they would receive if the rate remained unchanged.

Chapter Three: The Government’s response to the feedback received on the consultation questions 1 to 3

Introduction

35. The consultation posed three questions concerning the review of fixed rate revaluation of GMPs for early leavers:

• Question 1: Do you agree with a proposed rate of 3.25% per annum, to be applied from 6 April 2022?

• Question 2: Do you agree that we should adopt a short to medium term view on inflation and real earnings growth? and

• Question 3: Do you agree that DWP should continue to exclude the additional premium for fixing the revaluation rate of 0.5% per annum?

36. We received two responses to the consultation. One response was from the Pensions Administration Standards Association (PASA), a representative of the pensions industry with a particular focus on pensions administration. The other was from a private individual with a GMP as a part of their pension.

37. This chapter summarises the feedback received and sets out the Government’s response.

Question 1: Do you agree with a proposed rate of 3.25% per annum, to be applied from 6 April 2022?

Respondents’ views

38. Both respondents to the consultation addressed this question.

39. One respondent did not comment on the proposed rate itself, but was concerned that there should be enough time before 6 April 2022 for pensions administrators to implement the change, including revised calculations and communicating with scheme members. This respondent therefore asked that the new rate be communicated as soon after the consultation close as possible.

40. The second respondent stated that the proposed rate is too high. This respondent argued that a higher revaluation rate is detrimental to members of money purchase pension schemes which have a Guaranteed Minimum Pension underpin.

41. This respondent argued that the cost of securing a Guaranteed Minimum Pension with Fixed Rate Revaluation for early leavers can have a disproportionate impact on the size of the overall money purchase pension, and, indeed, that some pension schemes may be deliberately inflating the cost of securing a GMP in a money purchase scheme.

42. This respondent also asked that The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations are changed to provide more information to scheme members affected by this practice, so that members are able to make a more informed choice.

Government Response

43. The very small number of responses to this question suggests that the pensions industry is largely content with a proposed rate of 3.25% per annum for fixed rate revaluation of GMPs.

44. The Government will therefore lay regulations before Parliament bringing into effect a new rate of fixed rate revaluation of 3.25% per annum. This rate will apply to those who reach pensionable age on or after 6 April 2022.

45. We acknowledge that pensions administrators will need sufficient notice of a revised fixed rate revaluation change and will endeavour to publicise the new rate as soon as possible.

46. The Government has not previously been aware of concerns that the cost of securing a GMP with fixed rate revaluation for early leavers can have a disproportionate impact on the size of the overall money purchase pension. This concern has not previously been raised by stakeholders, and we have not seen evidence to support this argument.

47. It is also important to be clear that GMPs are very valuable pension benefits, as they mean that a person’s retirement income cannot decline below the amount of the Guaranteed Minimum Pension regardless of the value of their pension fund or the wider economic situation. In addition, a proportion of the Guaranteed Minimum Pension will also be inherited by a spouse or civil partner after the pension holder’s death, again guaranteed in value for life.

48. On balance, we therefore think that there is insufficient evidence of any problem to consider changing the proposed rate in order to address it – such an approach would be clearly disproportionate at this stage.

49. It is noted that the respondent who has raised these concerns is in contact with the National Audit Office (NAO). We hope that the respondent and the NAO are able to reach a conclusion which satisfies the respondent.

50. The Government does not plan to amend The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations.

Question 2: Do you agree that we should adopt a short to medium term view on inflation and real earnings growth?

Respondents’ views

51. One respondent agreed with a short to medium term view on the basis that “by keeping the view as short as possible the long run growth is more likely to match real long-run earnings growth”.

52. The other respondent did not express a view.

Government Response

53. As with question 1, the low number of responses suggests that the pensions industry is largely content with the decision to adopt a short to medium term view on inflation and earnings growth.

54. We agree with GAD’s approach to reviewing the rate of fixed rate revaluation. As stated above, we will therefore look to follow their advice and change the rate to 3.25% per annum.

Question 3: Do you agree that DWP should continue to exclude the additional premium for fixing the revaluation rate of 0.5% per annum?

Respondents’ views

55. One respondent agreed that the premium should continue to be excluded, stating: “There should be no additional premium when fixing the revaluation rate.”

56. This respondent argued that the addition of the additional premium would be detrimental to deferred members of contacted out money purchase schemes as it would further increase the cost of securing a GMP from a money purchase pension pot.

57. The other respondent did not express a view.

Government Response

58. The low number of responses suggests that the pensions industry either does not have any objections or agrees that the additional premium should not be re-applied for schemes which use the fixed rate revaluation method to revalue GMPs.

59. We will not re-impose the 0.5% per annum additional premium for schemes that use the fixed rate method to revalue GMPs. As we said in the consultation document, the premium is no longer appropriate given the change in the nature of the relationship between schemes and the State since the introduction of the single-tier pension. The consultation has not led to any evidence opposing this view.

60. As stated above, we have not previously been made aware of concerns about the detrimental impact of revaluation on money purchase pensions with a GMP underpin and have not seen any evidence to support this argument.

Chapter Four: Conclusion

Conclusion

61. The Government would like to thank those who responded to this consultation.

62. As there were just two respondents to the consultation there was no expression of wide-ranging views. We assume that this low number of responses is indicative of general support within the pensions industry for the position set out in the Consultation.

63. In view of this, and having carefully considered the responses received, we have concluded that the 3.25% per annum rate of fixed rate revaluation recommended by the Government Actuary’s Department (GAD) is an appropriate rate to be adopted from 6 April 2022.

64. The Occupational Pension Schemes (Schemes that were Contracted-out) (Amendment) Regulations 2022 will give effect to the new rate. We will seek to lay these regulations before Parliament in early 2022.

Annex A: Organisations which responded

• The Pensions Administration Standards Association (PASA)