In September 2019, the Parliamentary and Health Services Ombudsman found the Department for Work and Pensions had failed to inform certain savers that they would stop receiving inflation top-ups after the new state pension was introduced in 2016.
The ombudsman ruled the DWP “should ensure that its literature clearly and appropriately points out that some individuals who have large GMPs and reach state pension age in the early years may be negatively affected by the changes.”
It continued: “It should explicitly tell people to check their circumstances and should provide details to the public about how they can do this.”
But campaigners argue the government has still not acted on the issue, leaving people uninformed and potentially worse off.
The issue concerns savers with guaranteed minimum pension benefits who had contracted out of their state earnings-related pension scheme entitlement – who were typically members of a DB scheme.
GMPs were created due to contracting out, which meant defined benefit schemes could prevent their members tripling up on pension benefits by building up a basic state pension, state earnings-related pension scheme entitlement, and an occupational pension. In exchange for giving up Serps, both employees and employers paid less in national insurance contributions.
Schemes were not required to increase the GMP accrued between 1978 and 1987 in line with inflation. But benefits accrued between 1988 and 1997 were indexed, up to a maximum of 3 per cent a year.
But when the new state pension was introduced in 2016, contracting out ended and Serps was scrapped. Inflation increases for private sector schemes were also stopped — although they continued for public sector workers.
DWP ordered to communicate issue
GMPs are one of the most complex areas of retirement saving and last year the ombudsman compensated two individuals £500 and £750 respectively for the frustration and inconvenience caused by the DWP's lack of communication on this topic.
One of them has since died and his friend, Chris Thompson, a campaigner and a retired pension professional, is still waiting on the government to communicate changes around GMPs to those affected.
Mr Thompson is also angry at the unequal treatment meted out to private sector DB pensioners while public sector members are sheltered from the change.
He argued the government “had the nerve to pass a special law just before the new state pension started that public service schemes would have to take over the payment of GMP indexation in March 2016".
He added: “They extended that to March 2021 and now in the last week they started another investigation on what they should do [with those] reaching the SPA after 2021.”
He said: “Nobody has been informed yet. The ombudsman has been asking the DWP to come up with a way to tell people about it all but this has been dragging on for over a year. The report was done in September 30 last year and we have now reached October this year.”
The DWP defended its position in a letter dated August 28 to Stephen Timms, the chairman of the Work and Pensions Committee, from its permanent secretary Peter Schofield, saying it proposes to publish a factsheet on gov.uk and is awaiting comments from the PHSO.
A DWP spokesperson later said said this factsheet will be the main way of communicating to members.
Never properly explained
GMPs are the least understood part of the pension system, argued former pensions minister Ros Altmann.
She explained: “This is all so complicated that it has never been properly exposed, and the Parliamentary Ombudsman is absolutely right that this was never adequately explained either to parliament or to the public.”
Malcolm McLean, former chief executive of The Pensions Advisory Service, said: “The DWP saw the introduction of the new state pension as an opportunity to blanket off and end the special arrangements for inflation-proofing the GMP part of the old state pensions.”
He added: “It is true that the triple lock applies to the whole of the new state pension and therefore covers what would have been the additional pension bit under the old system, but that doesn't compensate fully the category of people now complaining to the Ombudsman.
“The fairly small awards that the Ombudsman has felt able to give hardly seem adequate.”
Kay Ingram, director of public policy at LEBC, said: “Publicity surrounding this issue was deliberately kept low-key as it was a cut in benefits which few would understand.”
Ms Ingram noted “the confusion caused and errors made in over 360,000 state forecasts issued last year has left some older workers ill prepared for retirement”, as some “have faced a triple whammy of a later state pension age, the loss of GMP indexation, and a reduction in their pre-2016 state pension, with little opportunity to make up for this in the post-2016 scheme”.
She suggested the DWP should send a letter to every person over age 50 explaining what they are entitled to under the state pension, refreshed every five years. “This is the standard which the DWP has set for private DC pensions,” she added.
But Steve Webb, partner at LCP and former pensions minister at the time the new state pension was introduced, noted that, despite the lack of communication, it was “not entirely clear what members could have done with that information even if they had been better informed about the changes.
“The 2016 reforms were fundamentally about stripping out complexity, including around contracting out and GMPs — and the complex pattern of gainers and losers is a direct consequence of that historic complexity."
Stephanie Hawthorne is a freelance writer for FTAdviser's sister title Pensions Expert
