Dealing with increases on GMPs in payment

I was recently asked a question about a scheme that does not increase post 1988 GMPs (‘post ’88 GMPs’) in payment on precisely 6 April each year and whether or not it is possible to offset? (‘frank’) the post ’88 GMP increase due on that date against increases provided on other elements of the member’s pension.

By way of background here, members who were contracted out on a defined benefit basis between 6 April 1988 and 5 April 1997 accrued a right to a post ’88 GMP (members contracted out in this way between 6 April 1978 and 5 April 1988 also accrued a right to a ‘pre ’88 GMP’).

Under Section 109 of the Pension Schemes Act 1993 (‘the Act’), post ’88 GMPs in payment must be increased each tax year in line with annual Orders made by the Secretary of State. The relevant Order for the 2024 / 25 tax year is available here.

Importantly, Section 109 of the Act requires that the increases on the post ’88 GMP must take effect from 6 April each year. (For clarity, no annual increase is required on any pre ’88 GMP in payment.)

This can be inconvenient for schemes, who often increase pensions in payment on a set date each year or (perhaps more rarely) on the anniversary of the retirement date.

The question, then, is whether such schemes can offset the increase due on the post ’88 GMP against any other increases that the scheme has provided on other elements of the pension in payment – as my enquirer put it, can a scheme “pre-load” the increase required?

I was able to confirm that it is indeed possible to frank increases due on any post ’88 GMP element (that ought to take effect on 6 April each year) against increases made to other elements of the pension during the previous tax year, where the increase made to those other elements in the previous tax year exceeded the statutory minimum requirements.

This is provided for under Section 53 of the Pensions Act 1995:

53 Effect of increases above the statutory requirement

(1) Where in any tax year the trustees or managers of an occupational pension scheme make an increase in a person's pension, not being an increase required by section 109 of the Pension Schemes Act 1993 [statutory increases on post '88 GMPs in payment] or section 51 of this Act [LPI increases on post '97 accrual], they may deduct the amount of the increase from any increase which, but for this subsection, they would be required to make under either of those sections in the next tax year.

(2) Where in any tax year the trustees or managers of such a scheme make an increase in a person's pension and part of the increase is not required by section 109 of the Pension Schemes Act 1993 or section 51 of this Act, they may deduct that part of the increase from any increase which, but for this subsection, they would be required to make under either of those sections in the next tax year.?

Example

We are approaching 6 April 2024.

Suppose that a member has a post '88 GMP of ￡300 a year and this is due an increase of 3% from 6 April 2024. The post '88 GMP due from 6 April 2024 should be ￡300 X 1.03 = ￡309 a year.

Further suppose that the member also has a pension in excess of the GMP in payment, all of which represented pre '97 accrual (so no statutory LPI required). At 6 April 2023, this was paid at a rate of ￡600 a year.

If, during the previous tax year (the 2023 / 24 tax year) the scheme had increased the excess over the GMP in payment by, say, 1% (so it increased from ￡600 to ￡600 X 1.01 = ￡606 a year), the scheme could offset this ￡6 non-statutory increase on the excess over the GMP against the ￡9 increase that 'ought' to be due on the post '88 GMP and only increase the GMP by ￡3.

The above rule applies for all post '88 GMP increases other than the one due for the tax year after which the member reached GMP payment age. The position for this 'first increase' is addressed in Section 110 of the Pension Schemes Act 1993, as follows:

110 Requirement as to resources for annual increase of guaranteed minimum pensions

(1) Except as permitted by section 53 of the Pensions Act 1995 [see above], the trustees or managers of a scheme may not make an increase in a person's pension which is required by virtue of section 109 [statutory increases on post '88 GMPs in payment] out of money which would otherwise fall to be used for the payment of benefits under the scheme to or in respect of that person unless-

(a) the payment is to an earner in respect of the tax year in which he attains pensionable age [normal GMP payment age] and the increase is the one required to be made in the next tax year;

…

The effect of this is that, where the scheme is paying a benefit in excess of the GMP, any increase on the post '88 GMP that 'ought' to be made on 6 April following the tax year in which the member reached GMP payment age, the scheme can frank that increase against any non-GMP element of the pension in payment.

For clarity here, under the first case (as covered in the Example above), the franking is against any increase in the pension in payment in the previous tax year (that was not a statutory increase), whilst in this 'first year' case, the franking can be made against the amount of the non-GMP pension in payment.

The above, of course, only reflects the statutory provisions and can, in practice, make a scheme more complicated to administer. As a result, some Scheme Rules will specifically prohibit or restrict this sort of approach.

Quite apart from the administrative complications that can arise, members don't usually like the use of this sort of offsetting, which they tend to view as the scheme 'giving with one hand and taking away with the other'. (I express no opinion on whether or not such a view is in any way correct – I am just commenting that this is how some members may perceive the situation.)

Aries Insight?provides comprehensive and detailed guidance on the application of the GMP increase rules, as well as insight into the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants.? If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at [email protected] or give me a call on 01536 763352.

Please note that?we are not lawyers or financial advisers.?The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.