The Department for Work & Pensions has been accused of delivering ‘a political response’ rather than a clear explanation of issues surrounding guaranteed minimum pension accrual.
David Green, independent financial adviser at Hampshire-based Independent Financial Solutions, asked the DWP whether an individual who contracted out of the additional state pension prior to 1987 and accrued a guaranteed minimum pension from their scheme, could expect the scheme to be responsible for paying any increases in payment relating to GMP accrued prior to April 1988.
He believed the scheme was not responsible for paying any increases, and the individual would be compensated through a higher state pension in payment.
Mr Green asked the DWP if this was the case, it would work with the new flat rate state pension.
In a letter sent to Mr Green on 29 June, the DWP stated the guaranteed minimum pension is part of an individual’s private pension and the government does not pay increases on GMPs.
It added most people who have been contracted out will be able to benefit from the transitional arrangements introduced from 2016.
The DWP also stated in the letter to Mr Green: “The government does understand that not everybody will benefit from the transitional calculation.
“However, while the uprating arrangements for pensions built up before 1997 are changing, people reaching state pension age from 2016 will benefit from the entirely different uprating arrangements introduced in the last parliament and which the government is committed to continuing throughout this parliament.”
Mr Green branded the DWP’s response “political”.
“It seems to me to be a political response - highlighting the potential benefits of the new pension while not really addressing the issue that large numbers of people are set to lose a significant benefit as a result of these changes.”
He said currently increases to pre-1988 guaranteed minimum pension (and certain increases to post-1988 guaranteed minimum pension) are paid to the client through the state pension.
“This creates complexity and in most cases clients will be relying on the DWP to calculate this correctly. Assuming they do though, it means that the client will receive a higher state pension in addition to the guaranteed income from their GMP pension.”
He added while the concept of a simpler flat rate state pension is welcome, it appears these increases will no longer be applied and no compensation is being offered for those who could miss out on potentially thousands of pounds of income over the course of their retirement.
“My concern is that most individuals affected by this will be unaware of the changes and so will not have the chance to address the issue, which a cynic would suggest is exactly what the DWP are relying upon.”
Mr Green said he wanted to highlight the issue in the hope the DWP will address it and communicate the effects of its reforms better – “and potentially offer some form of compensation for those adversely affected by them”.
A DWP spokesperson told FTAdviser: “Our analysis shows that by 2020 the majority of people with a pre-1988 guaranteed minimum pension will gain from the new state pension.
“Only a small minority will receive, on average, £2 a week less than if the old system had continued.”
Scott Gallacher, director at Leicester-based Rowley Turton said he agreed with Mr Green that some people will no doubt lose out under the new single tier state pension scheme.
“Unfortunately this was inevitable as the government was very clear at the time that the single tier state pension would be cost neutral. Consequently whilst there are many winners from this, there must be corresponding losers.
“There are supposed to be transitional arrangements to protect people, but as these are based around your initial state pension income they do not protect the potential pre-88 GMP increases.
“If the DWP figure of £2 per week is correct, then the loss individually would not be devastating but over time this would naturally add up.”
ruth.gillbe@ft.com
