Techzone

GMP: what it is, when it applies and how its calculated

Guaranteed minimum pension, commonly known as GMP, is the minimum level of benefit that normally has to be provided for anyone contracted out of SERPS (additional State pension) under a contracted out salary related pension scheme between 6 April 1978 and 5 April 1997. The GMP is a promise to pay a certain amount of defined benefit pension once the member reaches a certain age.

From 6 April 1997, the basis for contracting out under defined benefit schemes changed. A new qualitative standard, known as the 'reference scheme test', was introduced and contracted out benefits built up after 5 April 1997 became section 9(2B) rights. No more GMP rights could be built up after 5 April 1997.

Apart from contracted out salary related schemes, GMP rights can also be held within a suitable buy out contract (often referred to as a section 32 or deferred annuity) following a transfer from such a pension scheme.

GMP age
A member's GMP must be available to them from age 60 (women)/65 (men) regardless of the pension scheme's contractual pension age. But it can, in theory at least, be paid from the same normal minimum pension age as other benefits - age 55.

There are special rules that allow GMP benefits to be paid earlier than normal minimum pension age if the member:

• is in ill-health or
• has a protected low pension age

Of course, as with any pension rights, the payment of GMP will be governed by the rules of the pension scheme that holds them. This means that permission may be needed from the scheme trustees or the sponsoring employer if the member wants to draw retirement benefits before the earlier of age 60/65 or the pension scheme's contractual pension age.

Because GMP is a promise to pay a certain amount of defined benefit pension from age 60/65, if benefits that include GMP rights are paid early, the member's total pension must at least meet the revalued GMP benefit promise from age 60/65. For a defined benefit scheme this is unlikely to be a problem, but it could prevent early retirement under a buy-out contract.

Issues for buy-out contracts
A buy out contract often provides benefits on a money purchase basis, so the level of pension is determined by the investment return on the fund and annuity rates at the time of buying a pension.

However, if it contains liability for a GMP, the contract must promise to provide at least that pension from age 60/65, even if the fund wouldn't normally be sufficient to secure that level of pension. This is a liability that the contract provider takes on when they accept the original transfer from the defined benefit pension scheme.

So, if the fund is insufficient, the contract provider can refuse early retirement on the basis that the fund can't support a pension that will meet the GMP promise from age 60/65.

GMP entitlement
The Government's original intention was that the GMP provided to someone contracted out under a contracted out salary related pension scheme would exactly match the pension they'd otherwise have received under SERPS. But various factors and developments over the years mean that this isn't always the case.

The calculation of someone's GMP entitlement can be complicated. More guidance on calculating GMP is available in HMRC Guidance - How to calculate your scheme member's Guaranteed Minimum Pension.

Retirement benefits

Benefits provided from GMP rights have to meet contracting out rules set by the DWP, as well as the usual HMRC pension rules. These special rules continue to apply, even though contracting out under defined benefit schemes was abolished on 6 April 2016.

Although there are other minor differences, there are five key areas where the rules for GMP differ from the usual HMRC pension rules:

• Pension age
• Tax free cash
• Pension increases before retirement
• Pension increases after retirement
• Death benefits

There are also special rules on how GMP rights are treated on transfer.

Tax free cash entitlement

As GMP is a promise to pay a certain amount of defined benefit pension from age 60 (women) / 65 (men), it must normally be paid as a pension. No tax free cash can be paid from GMP rights, unless the member is retiring on grounds of serious ill-health.

However, providing the GMP liability is covered, where GMP rights are taken at the same time as other benefits under the same scheme, the member's tax free cash entitlement can be based on the total crystallised value (including the GMP rights). So, even though no tax free cash can actually be paid from the GMP rights themselves, the crystallised value of those rights is included in the tax free cash calculation.

Revaluation before retirement

All GMP must be revalued to some extent until it comes into payment, to protect them against the effects of inflation. The amount of revaluation required depends on:

• the member's age and
• whether or not they are an active member of the pension scheme

As long as a person is an active member of a contracted out salary related pension scheme, their accrued GMP entitlement is revalued each year up to age 60 (women) / 65 (men) in line with the increase in national average earnings. Revaluation orders, known as section 148 orders (previously section 21 orders) are published each April showing the percentage increases based on the increase in national average earnings for the year to the previous September.

If a member leaves the scheme before retirement, their accrued GMP entitlement is still revalued each year up to age 60/65. As an alternative to providing full revaluation in line with section 148 orders, the scheme can revalue the GMP at a fixed rate each year - known as fixed rate revaluation. This approach is very common under private sector pension schemes, as it gives a predictable liability rather than an open ended commitment linked to movements in national average earnings. The fixed revaluation percentage is determined by the date of leaving the scheme.

For members who left before 6 April 1997 there was another option, known as limited rate revaluation. Under this option:

• the pension scheme's liability for revaluing the accrued GMP entitlement is capped at 5% for each complete tax year between the member's date of leaving and start of the tax year in which they reach their 60th birthday (women) / 65th birthday (men)
• the State takes on the liability for providing any revaluation above 5% a year needed to match section 148 orders
• the scheme trustees have to pay a limited revaluation premium (LRP) to cover the cost to the State of taking on this liability

Deferring beyond 60/65
If the member retires more than seven weeks later than their 60th birthday (women) / 65th birthday (men), their accrued GMP must be increased by at least 1/7% for each complete week thereafter.

Increases in payment

GMP increases can sometimes be provided by the scheme, the State or a combination of the two.

Increases provided by the scheme
The level of increase that the pension scheme itself is responsible for providing depends on when the GMP was built up:

• GMP built up between 6 April 1988 and 5 April 1997 must increase in line with prices, capped at 3%
• GMP built up before 6 April 1988 does not have to be increased

Bear in mind that the rules of some occupational pension schemes might promise pension increases that are better than the minimum that the law requires.

Additional increases provided by the State
Whether someone gets any additional increases via their State Pension depends on whether they receive State Pension under the old regime or under the New State Pension. This is determined by the date they reach State Pension age (SPA).

• Before 6 April 2016 - Any additional increases needed to fully increase an individual's GMP in line with prices are provided by the State - this is done by increasing the individual's additional State Pension. The measure of the increase in prices was the Retail Prices Index (RPI), but since 6 April 2011, the Consumer Prices Index (CPI) has been used.
• On or after 6 April 2016 - The Government will no longer pay any appropriate increases relating to pre or post 6 April 1988 GMP along with the State Pension.

Other considerations: ill-health & triviality

Ill-health
In the event of the member's ill-health, a pension scheme can offer to pay benefits before the normal minimum pension age of 55. But if the benefits include GMP rights, they can only be paid out early on grounds of ill-health where the revalued GMP benefit promise from age 60/65 is covered.

If the member's life expectancy is less than a year, uncrystallised pension funds can generally be paid as a lump sum under the serious ill-health rules. Where GMP rights are involved, the amount of the lump sum depends on the member's marital status:

• Single - the full value of the GMP rights can be paid as a serious ill-health lump sum
• Married or in a civil partnership - the scheme needs to keep sufficient funds to provide the survivor's GMP. The balance of the value of the GMP rights, if any, can be paid out as a serious ill-health lump sum

Commuting small pensions for cash

• Triviality - As with other benefits, small pensions containing GMP rights can be paid as a one off lump sum (known as a trivial commutation lump sum) subject to the triviality rules.
  
  In addition, if a woman under age 60 or a man under age 65 wants to use the triviality rules, the value offered must be sufficient to meet the revalued GMP benefit promise from age 60/65. As with other early retirements, this is unlikely to be a problem for defined benefit schemes, but it could prevent early retirement under a buy-out contract.
• Small pots - Similarly, small pensions containing GMP can be paid out as a lump sum under what are commonly known as the ‘small pot rules’ where the value doesn’t exceed £10,000 and where certain other conditions are met. 

Our technical guide ‘Triviality and commuting small pensions for cash’ has further information on the conditions that must be met to allow commutation under triviality or small pot rules.

Transferring GMP benefits

GMP rights can be transferred to any other pension scheme, such as:

• a personal pension scheme
• a occupational money purchase scheme
• a contracted in or contracted out salary related scheme
• a suitable buy out contract
• a qualifying recognised overseas pension scheme (QROPS)

There can sometimes be issues that could prevent the transfer from going ahead - for example:

• Unfunded public sector schemes - Members of unfunded public sector defined benefit schemes can't transfer to money purchase schemes to access flexible benefits, unless their transfer request was made before 6 April 2015.
  
  But they are still allowed to transfer to a money purchase scheme if it's unable to provide flexible benefits. This allows transfers to access conventional annuities, which could help those who are unlikely to get value for money from their defined benefit promise - for example, those in poor health or single people who have no need for a survivor's pension on their death.
• GMP under money purchase buy out contracts
  Section 32 buy out contracts are usually money purchase arrangements, but can hold a GMP liability. When looking to transfer from these, the scheme will check that the transfer value they offer is sufficient to cover the GMP amount, and if it isn't, the transfer is not normally possible. This would be the case even where the receiving scheme is not contracted-out and the GMP liability would effectively disappear.
  
  If a transfer is prohibited because the value is less than the GMP liability, then the fund will have to stay within the section 32 until it increases to the point where a transfer is allowed. But this may never happen, and the section 32 will have to meet the GMP liability themselves when paying out the benefits.

In addition there are circumstances where the member would be required to get advice before a transfer to a scheme that can provide flexible benefits can go ahead. This applies where the value of 'safeguarded benefits' exceeds £30,000. GMP rights fall into this category. More information on this can be found in our guide 'Pension transfers - DB to DC'.

How GMP rights are treated following a transfer depends on the nature of the receiving pension scheme:

• Money purchase OPS or PPP - On transfer to an occupational money purchase scheme or a personal pension scheme (including a SIPP or stakeholder pension scheme) the GMP rights will be treated as normal 'excess' benefits - the same as any non-contracted out rights being transferred. The defined benefit guarantee is lost and the pension benefits available will be determined by the investment return and market conditions when the pension starts.
• Contracted-out salary related scheme (COSR) - On transfer to a contracted out salary related pension scheme, the rights will keep their status as GMP. The receiving scheme must be willing to accept the GMP liability and the basis of revaluation.
• Buy out contracts - On transfer to a suitable buy out contract (often referred to as a section 32 or deferred annuity), the rights will keep their status as GMP. The receiving insurer must be willing to accept the GMP liability, and the basis of revaluation, so will check the transfer value to make sure it'll cover the revalued liability.
  
  However, depending on the nature of the contract, the transferred GMP may be held within a money purchase structure rather than maintaining a pure defined benefit promise.

Divorce
If GMP rights are awarded to an ex-spouse as part of a pension sharing order, they are no longer treated as GMP rights and are treated in exactly the same way as excess benefits.

Death benefits

The death benefits payable from GMP rights depend on whether the member:

• is single or married/in a civil partnership
• leaves a widow, widower or civil partner and
• dies before or after drawing their GMP

Member is married or in a civil partnership
If the member is married or has a civil partner when they die:

• a surviving widow must normally receive a pension of 50% of the member's GMP
• a surviving widower or civil partner must normally only receive a pension of 50% of the part of the member's GMP built up after 5 April 1988. But, there's no right to a widower's or civil partner's pension based on GMP built up before 6 April 1988

There are, however, some exceptions to these rules. For example, the survivor's GMP can be stopped if they remarry or enter a civil partnership before age 60 (women) / 65 (men).

The survivor's GMP paid from the scheme must increase in the same way as the member's GMP and will be taxed as income - even, from 6 April 2015, if the member dies before age 75.

Small survivors pensions, including any GMP, can be commuted and paid as a one off lump sum (known as a trivial commutation lump sum death benefit) provided the value of the lump sum is no more than £30,000.

Member is single
If the member is single when they die, there will normally be no benefit payable from their GMP. The only exceptions may be where:

• the GMP rights are held within a money purchase environment, such as under a buy-out contract, in which case a lump sum death benefit might be available from the funds underpinning the GMP promise or
• there's a pension guarantee attached to the GMP and the member dies after retirement within the guarantee period

GMP equalisation

Following a European Court of Justice ruling on 17 May 1990 (Barber versus Guardian Royal Exchange Assurance Group), occupational schemes were obliged to provide equal benefits for men and woman from that date onwards.

But it wasn’t clear if this meant that GMP benefits had to be equalised too - GMP was intended to replicate additional State Pension which didn’t have to be equal between the sexes. As a result, most schemes chose just to equalise non-GMP benefits.

On 26 October 2018, the High Court in England ruled in the ‘Lloyds Bank case’ that all GMP benefits relating to service from 17 May 1990 to 5 April 1997 must be equalised too. The judgment could affect the pensions of both men and women. Nobody’s pension entitlement should reduce as a result of GMP equalisation.

On 20 November 2020, the High Court made a further ruling which clarifies that GMP equalisation also applies to past transfers. So pension schemes will need to revisit any past transfer payments where the member had accrued GMP from 17 May 1990 to check if any additional value (a ‘top-up payment’) is due.

Why is there inequality in GMP benefits?

There can be several reasons for inequality in GMP benefits between men and women:

• GMP is payable from different ages
  For men, GMP is payable from age 65, but for women it’s payable from age 60. 
• Women accrue GMP at a higher rate
  As women have a shorter maximum qualifying service period for GMP (44 years as opposed to 49 years for men), they accrued GMP at a faster rate than men. So if you had a man and a woman with the same period of service and pension on leaving, a higher proportion of the woman’s pension would be GMP.
• Revaluation in deferment
  Revaluation of GMP benefits is usually higher than revaluation of non-GMP benefits, so this normally favours women due to the higher proportion of GMP.
• Increases in payment
  For the period in question, there’s a requirement for GMP benefits in payment to increase each year by CPI up to 3%, but there’s no statutory requirement for non-GMP increases - however, scheme rules will often provide for increases.
  
  Depending on the level of non-GMP increases provided (if any), this could favour either men or women due to the different proportions of GMP accrued.

Method of equalising GMP benefits

There’s no single method by which schemes must equalise GMP benefits. The High Court judgement provided a number of methods that could be used and it’s up to the trustees and employer of each scheme to decide what method is most appropriate for their scheme.

Transfers

Where benefits relating to the equalisation period have been transferred out before GMP was equalised, a top-up payment may be due.

• Individual transfers - any top-up due would be paid by the transferring scheme.
• Bulk transfers - where mirror image benefits are provided in the receiving scheme, it’s up to that scheme to equalise the benefits and the transferring scheme has no liability (unless under a separate agreement or warranty given at the time of transfer).

In the Lloyds Bank case, the assumption was that any top-up payment would be made to the scheme which received the transfer. However, there can be difficulties in practice - for example:

• the individual may no longer be a member of the receiving scheme - they may have transferred again or fully taken their benefits via tax free cash and an annuity or via UFPLS
• the receiving scheme may refuse to accept the top-up payment

However, the individual can ask the transferring scheme to pay the top-up to another pension scheme or to receive the payment directly, less the appropriate amount of tax.

The court in the Lloyds Bank case ruled that top-up payments should bear interest at 1% above base rate.