Defined Benefit GMP Increase Rates When Deferred

GMP is the Contracted Out of SERPS (State Earnings Related Pension Scheme – a ‘top up’ 2^nd tier to your state pension) part of your defined benefit/safeguarded rights pension.

Revaluation rates are the increases applied to your pension between your date of leaving the scheme and when you take the pension or transfer it.  When you leave a defined benefit pension or have transferred benefits to a S32 Buy Out plan, there are three ways of revaluing the Guaranteed Minimum Pension (GMP) rights from date of leaving, the ‘Contracted Out’ of SERPS part of your pension scheme.

1. Section 148 orders

The value of the GMP part of your pension is increased each year in line with the National Average Earnings Index (wages inflation) under Section 148 orders.

2. Limited revaluation

Limited revaluation revalues GMP in line with Section 148 orders i.e. National Average Earnings Index (wages inflation) but is capped at a maximum of 5% per annum. 

If wages inflation was higher than 5% pa, the Department for Work and Pensions will pick up the difference after a Limited Revaluation Premium (LRP) has been paid by the scheme to them, effectively making the GMP part of your pension scheme the equivalent of a full wages inflation, Section 148 orders scheme. 

Limited revaluation was abolished for leavers on or after 6 April 1997. However, it is still possible for preserved pension accrued before 6 April 1997 to have limited revaluation applied to the GMP element.

3. Fixed rate

The GMP part of the pension is revalued from date of leaving the scheme by a fixed amount on the date you left.  The rate at the date you left is the rate that is used from then on, right up until today.  For example:  if you left the scheme in 1992, the fixed rate of revaluation on the GMP element is permanently set at 7.5%pa (the rate does not change).  See the following dates and fixed rates

• 6/4/2017 – 5/4/2022 = fixed revaluation of 3.50% pa
• 6/4/2012 – 5/4/2017 = fixed revaluation of 4.75% pa
• 6/4/2007 – 5/4/2012 = fixed revaluation of 4.00% pa
• 6/4/2002 – 5/4/2007 = fixed revaluation of 4.50% pa
• 6/4/1997 – 5/4/2002 = fixed revaluation of 6.25% pa
• 6/4/1993 – 5/4/1997 = fixed revaluation of 7.00% pa
• 6/4/1988 – 5/4/1993 = fixed revaluation of 7.50% pa
• 6/4/1978 – 5/4/1988 = fixed revaluation of 8.50% pa

Most private sector pension schemes use Fixed Rate revaluation so that a pension scheme’s future liabilities can be measured.  Most government type pensions use S148 orders.

Integrating GMP into Pension

Many pension schemes used the GMP element to subsidise the main pension benefit.  E.g. if you are entitled to a £10,000 pa pension including GMP (SERPS) of £2,000pa then you do not get £12,000pa, you get £10,000 pa with the £2,000 absorbed inside the scheme.  This was to help employers subsidise the cost of the pension and is known as ‘Franking’.  Franking was banned for leavers after 31 December 1984.