Ahead of the introduction of the new flat-rate state pension in April, the National Audit Office (NAO) is warning that pension payments for people with Guaranteed Minimum Pensions (GMP) who contracted out in the 1980s, could receive a lower income, criticising the Department of Work and Pensions (DWP) for poor communications on the issue, reports Pat Sweet
DWP estimates suggest more than two million people will reach state pension age in the next five years, of whom up to 900,000 have a Guaranteed Minimum Pension (GMP) as a result of opting to ‘contract out’ of the additional state pension. Analysis estimates that nearly 200,000 people are at risk of receiving a lower than expected state pension payment.
When contracting-out was introduced in 1978, the government’s basic principle was that these individuals should not be any worse off as a result of having been a member of a contracted-out scheme.
The changes in April 2016 will end contracting out and introduce a new flat-rate state pension for everyone retiring after this date. Working-age people will have their existing state pension entitlement adjusted for previous periods of contracting out and transferred to the new state pension scheme. Occupational pension scheme providers will continue to revalue any Guaranteed Minimum Pensions that people have built up.
The NAO says it has been contacted by several members of the public concerned that people with Guaranteed Minimum Pensions will be worse off, and that the DWP has not given sufficient warning to people who will be affected.
As a result, the watchdog has prepared a report on what it describes as ‘a complicated area of pension reform’. Under existing rules, pension scheme providers uprate Guaranteed Minimum Pensions accrued between 1988 and 1997 up to a maximum of 3% per year. DWP then recalculates the state pension payable each year, which makes sure that a person’s Guaranteed Minimum Pension entitlement is uprated. While the Department does not make any payments directly towards Guaranteed Minimum Pensions, it bears some of the costs of uprating and so, in effect, pays for a share of inflation increases.
No uprating pre-1988
For people retiring after 6 April 2016, the changes mean any Guaranteed Minimum Pensions that people have accrued between 1978 and 1988 will not be uprated, and the scheme provider will only uprate Guaranteed Minimum Pensions built up between 1988 and 1997 to a maximum of 3% each year.
People who have already started claiming their state pension will be unaffected, but the increases in state pension age means that Guaranteed Minimum Pensions could lose more value before people draw their state pension. Since 2010 the state pension age has been increasing but the Guaranteed Minimum Pension age will remain at 60 for women and 65 for men.
As a result, there could be a longer period in which Guaranteed Minimum Pensions are not uprated fully before the individual receives their state pension.
The amount individuals will be affected will depend on the time they were in a contracted-out scheme, the value of their new state pension, how the government decides to uprate the state pension and future inflation rates.
The type of person who will do worse under the reforms is someone who has spent long periods in a contracted-out pension scheme and is close to retirement on 6 April 2016, so has little time to build up additional entitlement to new state pension.
180k
Number of people who will reach state pension age in 2016-17 with Guaranteed Minimum Pensions (GMP) from before 1988
DWP estimates that 180,000 people who will reach state pension age in 2016-17 will have Guaranteed Minimum Pensions from before 1988. Its modelling forecasts that 50,000 of these people will be worse off in 2017-18 as a result of the introduction of new state pension.
However, the NAO says the department’s baseline information about the impact of pension reforms on people with Guaranteed Minimum Pensions is limited.
In January 2016, DWP modelled how people in contracted-out pension schemes could lose out, using hypothetical information to test the impact of pension reforms.
It has not, however, used information on people’s actual circumstances, and in addition, it does not know what proportion of state pension payments relates to its share of uprating Guaranteed Minimum Pensions.
The watchdog concludes there has been a lack of clear information for people with Guaranteed Minimum Pensions. While the Department has issued factsheets on the new state pension, it has provided limited details on the circumstances in which people with Guaranteed Minimum Pensions could end up worse off under the new arrangements, arguing it could be misleading to show people how they might be affected by one aspect of pension reforms in isolation, without considering the combined impact of changes.
DWP is now increasing its communication of new state pension reforms. Its campaign targets people aged 50 plus and includes a state pension toolkit and the offer of personal statements, and more information about the implications of contracting out.
NAO’s report concludes: ‘We are concerned that the department has limited information about who is affected by the impact of pension reforms on Guaranteed Minimum Pensions. It is now seeking to improve how it communicates the impact of pension reforms, and will need to help people identify how they are affected and provide them with accurate and more complete information so that they can make informed decisions about their future pension arrangements.’
The NAO report on State pension reforms and guaranteed minimum pension is here
