Guaranteed Minimum Pension (GMP) Definition
What Is the Guaranteed Minimum Pension (GMP)?
The Guaranteed Minimum Pension is the minimum pension that a United Kingdom occupational pension scheme must provide those public sector employees who were contracted out of the State Earnings Related Pension Scheme (SERPS)between April 6, 1978, and April 5, 1997.
Key Takeaways
- The Guaranteed Minimum Pension exists to offset wages to public sector U.K. employees.
- The GMP was brought forth as a way to make sure companies were paying employees their deserved pensions, even if they deferred contributions.
- This way of managing pensions was abolished in 2016. If there were employees receiving a pension that would have previously been considered as a benefit for GMP, now they are simply paid the base rate.
Understanding the Guaranteed Minimum Pension (GMP)
The guaranteed minimum pension amount paid was roughly equivalent to the amount an employee would have received if they had not been contracted out of the state pension scheme. Starting April 6, 1997, a reference scheme test replaced the guaranteed minimum pension system. The test evaluated the overall benefits provided by the scheme as opposed to an individual guarantee for each participant. If the scheme passed the test, it retained its ability to be contracted out, however.
There were two main components to the U.K.’s old pension system: a basic state pension and the State Earnings Related Pension Scheme, also known as the Additional State Pension. Employees who paid National Insurance Contributions at the full rate built up a basic state pension. However, not all employees built up a SERPS. Many were contracted out of the state pension, either voluntarily or because their pension plan did so on their behalf.
The government allowed employers that offered defined benefit schemes to contract out their staff and pay a reduced rate of National Insurance Contributions. In exchange for paying lower rates into the National Insurance, the companies promised that their pension would meet a minimum standard of benefits. In short, they had to at least match the SERPS pension that the worker would have received otherwise. This payment became known as the guaranteed minimum pension.
Notably, workers whose employers offered defined contribution pensions did not have the same guarantee. Also excluded were those individuals who put their National Insurance rebates into personal pension schemes.
At the outset, the state paid cost-of-living increases with the individual’s state pension. However, after April 6, 1988, any cost-of-living increases became the responsibility of the occupational pension scheme. From that point, increases followed the Consumer Price Index to a maximum of 3%.
April 2016 GMP Changes
As of April 2016, the U.K. government changed the state pension scheme in several rather significant ways. As part of the adjustment, workers would no longer build up pension rights under SERPS.
Also, the government discontinued the practice of contracting out of the pension scheme. Starting April 2016, a system based on a one-off calculation determined the pension amount that retiring individuals would receive. Someone who has been extensively contracted out simply receives the basic state pension figure.