When a member retires, or leaves an ex COSR scheme, GMP is calculated. GMP calculation is complex, and is based on earnings between upper and lower earnings limits (currently £43,000 pa and £5,824 pa) for each year of contracted-out service. Before 6 April 1987, contracted-out contributions rather than earnings are used. This amount is then revalued to GMP age to protect it against inflation.
If a member starts to receive his other scheme benefits before GMP age, they may be reduced to ensure there are sufficient funds to pay his GMP from GMP age. If a member postpones receiving his GMP after GMP age, a statutory increase to GMP is applied.
When a member ceased to be in contracted-out service (before 6 April 2016), his GMP was increased or revalued, for each complete tax year to GMP age. There are now two alternative ways to revalue GMPs.
Most GMP rules allow Trustees to select which rate of revaluation the Trustees use from time to time.
Section 148 Orders
This is an index based on National Average Earnings. Section 148 Orders are published each year specifying the minimum increase based on National Average Earnings. Public sector schemes also often use Section 148 Orders for revaluation.
Most private sector schemes used a rate of revaluation which was “fixed” at the date a member left contracted-out service, so it could be ascertained at that time. Currently, the annual percentage revaluation increase is 4.75%.
At 6 April 2016, all ex COSR schemes ceased to contract out, and in order that an ex COSR scheme could continue to use fixed rate revaluation, but using the rate in force at end of a member’s pensionable service (rather than at 6 April 2016 when contracted out employment ended), there is now a statutory modification power, exercisable by scheme trustees before 6 April 2017 (which can be backdated to 6 April 2016).