History of Poor Laws, State Pensions, Contracting Out and GMPs

Looking back in history, the first ‘Poor Laws’ originated in the 14^th century from the Black Plague and a lack of workers as nearly 40% of the population perished.

1349-50 Laws were passed that everyone that could work should work to keep the costs of labour down.  This continued through the centuries with Monasteries and Abbey’s helping the charitable help for the sick and infirm.

1497-1598 Various Tudor period Poor Laws were passed to ensure no vagabonds, beggars and strays.  A more formal legal code was set out as Henry VIII dismantled the Catholic system, demolished abbeys etc and more formal Parish laws were put on place for local parish taxes to pay for the welfare of the elderly, sick and infirm as well as stocks being set up in each parish to lock up vagrants and only be fed bread and water for 3 days, then moved on.  Able people continued to be made to work but parish taxes were unpopular.  Parish Council charges still appear in our council taxes today.

1832 - Poor Law Amendment Act.  Poor Laws had been in place for nearly 500 years and were amended so that no able-bodied person was to receive financial or other help from the Parish Councils except in they were in a workhouse. 

Victorian era – Britian was becoming wealthier, and the workhouse system declining, with people saving and/or being involved in Friendly Societies gradually supplying even greater help without breaking any poor laws as well as the Salvation Army starting in 1865 to provide shelter (outside the Church Parish and workhouse system) for those in need.  Indeed, the Salvation Army still does this today.

1909 - The first 'Old Age Pension' was introduced by Lloyd George.  The ‘state’ pension was 5 shillings per week, or 7 shillings and sixpence for a married couple from age 70.  This was means tested and only payable to people with an income below £21 a year.

1948 - National Assistance Act introduced the ‘old age’ basic state pension system as we know it today.  This was not means tested and basic upon social security contributions.

1961-1975 - National Insurance Act 1959 introduced a 2^nd tier state pension on top of the old age pension based upon national insurance contributions.  This was called the State Graduated Pension and pensioners today may still see details of their Graduated Pension benefits in their state pension statements.

SERPS and Guaranteed Minimum Pensions (GMPs)

1978-2002 - Social Security Pensions Act 1975 replaced the Graduated pension with the State Earnings Related Pension Scheme (SERPS) a bigger and more robust 2^nd tier to state pensions.  This ran until 2002 and was paid by some of your National Insurance Contributions (NICs) as well as NICs still paying for your basic state pension credits.

• Your workplace defined benefit pension was allowed to contract you out of the 2^nd Tier pension SERPS.  Many of you will have been contracted out or heard of being ‘contracted out of SERPS. 
• The Old Age Basic State Pension was unaffected but by being contracted out of SERPS, part of your NICs were paid to your employer’s defined benefit final salary pension scheme. 
• This reduced costs for employers for there pension schemes but was done on the promise that the defined benefit scheme offered a Guaranteed Minimum Pension (GMP) at least equivalent to what you would have received from SERPS and at least at a 1/80^th defined benefit accrual.

2002-2016 - SERPS was replaced by S2P (State Second Pension) but GMPs remained to match both SERPS and S2P and replaced by something known as Section 9(2B) rights – the Requisite Benefits Test from 1997 which was prescribed the accrual rate of GMPs rather than a minimum of 1/80ths defined benefit accrual.

2016 - The Old Age Basic State Pension and SERPs/S2P were merged to great ‘fanfare’ to offer a larger combined New State Pension.  Tests are still made to ensure that you will get the higher of the New State Pension or the old system of Basic State Pension and SERPS/S2P if it would have been bigger.  Long term though, with the phasing out of SERPS/S2P, this is saving the government £millions.

GMP Revaluation

Your GMP benefits inside your Defined Benefit Pension (or S32 Buy out if you transferred out of your company pension) must be revalued when you leave according to the law to protect those national insurance contributions that were redirected into your company pension.  There is a legal requirement to revalue your GMP benefits based upon 2 routes now:

1. Fixed Revaluation of GMP (depends on when you left service)

• Pre-1988 –  8.5% pa
• 1988/93 – 7.5% pa
• 1993/97 – 7.0% pa
• 1997/2002 – 6.25% pa
• 2002/07 – 4.5% pa
• 2007/12 – 4.0% pa
• 2012/17 – 4.75% pa
• 2017/22 – 3.5% pa
• 2022/27 – 3.25% pa

1. Section 21/Section 148 Orders Revaluation of GMP

• GMP increases each year in line with the national average earnings index.

State Pensions in Payment (when you retire)

Currently, state pensions increase each year via the Triple Lock of the higher of:

• Consumer Prices Index (CPI) from the previous September
• National Average Wages Index
• 2.5%

GMPs In Payment (i.e., when you retire from your defined benefit company pension or S32 buy out)

• Pre 1988 GMP accruals – no requirement for pension scheme to increase GMP benefits as the State will increase via an addition to your State Pension
• Post 1988 GMP accruals – your pension scheme must cover some of the at the lower of Consumer Prices Index (CPI) or 3%.  The state no longer covers any additional increases.

Contact  Call Back  Calculators  Our Fees