Government confirms reduced GMP revaluation rate plans

Legislation to reduce the fixed rate of revaluation of guaranteed minimum pensions (GMP) for early leavers from 3.5 per cent to 3.25 per cent per annum from 6 April 2022 has been introduced to parliament.

The new rate, which reflects a long-term reduction in the rate of revaluation applied to fixed rate revaluation GMPs, will apply to contracted-out members who leave pensionable service in the period 6 April 2022 to 5 April 2027.

Whilst it will represent a small reduction in the increases members will see on their GMPs if these are uprated according to the fixed rate, schemes which revalue GMPs based on the fixed rate are expected to see a slight decrease in projected GMP costs.

Advice on the issue was obtained from the Government Actuary's Department (GAD) to support the Department for Work and Pensions' (DWP) review of the rate, which is required every five years.

GAD's review suggested that a new fixed rate revaluation rate of between 3 per cent per annum and 3.5 per cent per annum for the period 6 April 2022 to 5 April 2027 would be a more appropriate range, given current trends in inflation and wage growth, with 3.25 per cent deemed a "reasonable" mid-point.

The government also ran a consultation on the proposed move to 3.25 per cent in September 2021, although it has since confirmed that this received just two responses, one from a private individual and one from a representative of a pensions industry body.

In light of this, the DWP has pushed forward with the proposed changes, with legislation on the issue laid before parliament today (21 February).

The Department for Communities in Northern Ireland will also be producing its own
legislation replicating the effect of this instrument for Northern Ireland.

Commenting within the consultation response, Pensions Minister, Guy Opperman, said: "Ensuring that GMPs for people who leave their pension schemes early receive a rate of revaluation which takes into account this erosion in value caused by inflation over time is therefore crucial.

"This will help to ensure that the hard work people put in is rewarded by having the value of their future retirement income protected. Equally, however, it is right that GMPs paid as part of an occupational pension are not subject to unreasonably high rates of revaluation which might reward those members with a GMP more generously than those without, and might put the funding of the scheme and affordability for the sponsoring employer under unwarranted pressure

"We review and consult on the rate of revaluation which must be applied to those schemes that use the fixed rate revaluation method to increase GMPs to ensure it remains appropriate. A review and consultation every five years ensures that the industry and individuals have an opportunity to consider the process in the round, and to allow the government to reflect on any views they may have in the light of the evolving economic position, and the pensions landscape.

"I am now pleased to publish a government response to the consultation, outlining final decisions on a change in the rate of fixed rate revaluation and discussing respondents’ views. The very small number of responses received suggests that the vast majority of the pensions industry agreed with my department’s approach."

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