A guide to the contracted out payment equivalent (COPE), and guaranteed minimum pension (GMP)
This guide explains briefly what GMP is and how it affects the amount of pension you are paid. It is not intended to provide an in-depth explanation of GMP.
At State Pension age, although the Police Scheme remains responsible for updating the bulk of your police pension, in line with the relevant index, the State becomes liable to index link the much smaller Guaranteed Minimum Pension element of your police pension.
Use the links for a full explanation:
- Index Linking of state and police pensions
- Parliamentary Note Re GMPs
- Parliamentary Briefing on GMPs – May 2014
- Home Office Circular 31/2008 Re GMP Overpayment
- National Audit Office Report on GMP Overpayment
This is not the case however for those permanently resident abroad in a country where the state pension is frozen, which includes; Australia, Canada, New Zealand and South Africa.
In these cases the Police Pension Scheme, by a Treasury Direction (currently dated 6 July 2000) does not reduce their inflation-proofing and the full increase is applied.
See Home Office Library document below from page 21 onwards.
Public service pensions
The arrangements in place before 6 April 2016 ensured that public servants received indexation on their GMP, while preventing double increases. (HM Treasury guidance, May 2001). Because the mechanism in the old State Pension for providing full indexation of GMPs, is not part of the new State Pension, the Government had to consider how to deliver on commitments by previous governments that public service pensions would be fully indexed. In March 2016, it announced that those reaching State Pension age between 6 April 2016 and 6 December 2018 would receive a fully-indexed public service pension for life. (HM Treasury press release, 1 March 2016). In November 2016, it launched a consultation on how to address the issue in the longer term. It aimed to consider two issues:
- How best to avoid the introduction of unequal payments to men and women in the public service schemes that will result from the abolition of AP. There are legal requirements to pay men and women equal pensions in respect of pensionable service after 16 May 1990, and the old arrangements were designed to deliver equalisation by way of increases to AP
- Whether, following the introduction of the new State Pension, the public service pension schemes should pay full indexation on GMP earned while a member of a public service pension scheme, for someone who reaches SPa after 5 December 2018.
Indexation and equalisation of GMP in public service pension schemes- response to the consultation (January 2018)
From this report, the Government announced the extension of the current interim solution so that it applies to those who reach SPa on or before 5 April 2021.
Members of public service pension schemes with guaranteed minimum pension entitlements, who reach SPa on or after 6 December 2018 and before 6 April 2021 will be covered by this extension of the interim solution.
The end date of 5 April 2021 is the day before annual guaranteed minimum pension increase orders are applied.
On 18 April 2019 the Department for Work and Pensions (DWP) published guidance setting out how the Guaranteed Minimum Pensions (GMP) conversion legislation might be used to resolve the GMP inequality issue, following the handing down of the Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc [2018] EWHC 2839 (Ch) judgment. The High Court held that scheme benefits must be equalised for the effect of GMPs and that the conversion of GMPs into main scheme benefits (referred to as method D2 in the judgment and the method the DWP consulted on in November 2016) is a viable way of equalising GMPs (by converting the higher of the actuarial equivalent of the unequalised female pension and of the actuarial equivalent of the unequalised male pension. The higher of these actuarial equivalents is then used for the purpose of GMP conversion).
The DWP guidance forms a ten-step process which aims to provide trustees with a ‘recommended road map’ in ensuring they comply with the judgment. The guidance begins with a GMP reconciliation and rectification process whereupon the trustees must then reach agreement with the employer that GMP conversion is to be undertaken. The members for conversion must then be identified as well as the benefits which are to be amended as part of the conversion process and the form the new post conversion benefits will take.
The next step is the conversion date must be set, and the trustees must consult with the selected members to inform them of the proposed conversion and seek their views on the process. The DWP expects trustees to take all reasonable steps to consult members. The next stage is the valuation process where the trustees instruct the scheme actuary to value for each selected member’s benefits being converted and the member’s benefits in respect of the same part of pensionable service at the conversion date. After this schemes will then equalise benefits, taking the more valuable of the male or female benefit structure with payments adjusted to this effect.
It is then necessary to determine the post-conversion benefit and the actuary then certifies that the calculations are complete and that the post conversion benefits are actuarially at least equivalent to the pre conversion benefits. The trustees then resolve to carry out the conversion on the agreed basis or use the scheme’s amendment power which may include amendments necessary to facilitate conversion. After this the trustees must take all reasonable steps to notify members of the conversion process. HMRC also needs to be notified.
However, the government highlights that the guidance merely describes one way of equalising GMPs and it is not placing any obligation on schemes to use the method set out in the guidance. It is up to the trustees of each scheme to decide the methodology that this most appropriate for their scheme. HMRC is also currently looking possible tax issues arising from addressing GMP inequalities and has confirmed it is considering lifetime allowance and protections, annual allowance, lump sum payments and transfers. It is to provide more information and guidance on this issue in its pension scheme newsletters in the coming months. Meanwhile, the DWP suggests that trustees may want to pay out the current benefit, subject to later adjustment where necessary.