Guaranteed Minimum Pensions Increase Order 2024

Tuesday 27th February 2024 Grand Committee

Considered in Grand Committee

18:22

Moved by

[Viscount Younger of Leckie]

That the Grand Committee do consider the Guaranteed Minimum Pensions Increase Order 2024.

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Viscount Younger of Leckie) (Con)]

My Lords, this order was laid before the House on 15 January. It is a routine and quite technical annual order and is usually debated alongside the Social Security Benefits Up-rating Order 2024, which we have just finished discussing. Unusually, this year, we are running the orders one after the other, as determined by the Whips’ Office. I hope the Committee will agree that this order is not considered too controversial.

The order sets out the annual amount by which the guaranteed minimum pension—the so-called GMP, which is part of an individual’s contracted-out occupational pension earned between April 1988 and April 1997—must be increased. This year, occupational pension schemes that provide GMPs are required to increase GMPs earned during that period which are in payment by 3%.

I start by giving a bit of background on GMPs. They were created to help employees save income for their retirement but in an affordable way. The state pension used to be made up of two parts: the flat-rate basic state pension and the earnings-related additional state pension. The flat-rate basic state pension was funded through national insurance and paid at the full rate to those with sufficient qualifying years of national insurance contributions, or pro rata for those with a partial record.

The second part of the state pension, the additional state pension, was linked to a person’s earnings. The higher earnings-related national insurance contributions applied to both the employee and the employer and built entitlement to an additional state pension, based on the employee’s earnings. The intention was to ensure that as many people as possible were able to save towards an earnings-related work-based pension that would supplement their basic state pension in retirement.

The additional state pension was introduced in 1978. At the time, many employers were already offering their employees a workplace occupational pension through their own scheme. Therefore, having both an earnings-related additional state pension and a company occupational pension was seen as dual provision. It was overly complicated and potentially unaffordable for employers and employees.

The then Government therefore decided to deal with this through the system of contracting out and the associated provision of guaranteed minimum pensions. Between April 1978 and April 1997, employers sponsoring salary-related schemes could contract their employees out of the additional state pension through membership of the company pension scheme, as long as that pension scheme paid its members a guaranteed minimum pension as part of their occupational pension from the scheme.

The idea was that, rather than paying additional national insurance to the state, people would instead build up a similar amount of occupational pension through their workplace pension schemes. This was the guaranteed minimum pension. It was broadly equivalent to the additional state pension foregone, and it set a level below which the occupational pension could not fall. In return, both the scheme members and the sponsoring employer of the scheme paid lower national insurance contributions. Most schemes provided pensions above this set minimum, with many providing pensions that were significantly higher. The pensions provided above the GMP have their own rules; however, the GMP provides a useful minimum benefit for members. I think that covers the relevant background to the order, which may be familiar to the Committee, and I hope this gives a sense of what was happening at the time and why the order is still important.

Moving on to the order itself, the GMPs increase order relates specifically to members who were contracted out of the additional state pension between April 1988 and April 1997. The order provides these members with a measure of inflation protection for the GMP element of an occupational pension scheme built up between 1988 and 1997.

As your Lordships may be aware, legislation states that when there has been an increase in the annual level of prices, as measured at the previous September, the order must raise the GMP element of an individual’s occupational pension that was earned between 1988 and 1997 by this percentage increase or 3%, whichever is lower. As September 2023’s consumer prices index figure was 6.7%, this means that the increase for the financial year 2024-25 will be 3%. The cap of 3% for GMPs earned between those years aims to achieve a balance between providing some measure of protection against inflation, while not increasing schemes’ costs beyond what they can generally afford.

The cap provides schemes with more certainty, allowing them better to forecast their future liabilities, which is important when they are considering their funding requirements. If there were no limit on the increases, the higher costs could put unreasonable pressure on schemes, which could put their future viability at risk. The cumulative effect of high increases every year could be significant.

A point that has been raised previously, including in the debate last year, is the suggestion that requiring schemes to index post-1988 GMPs was introduced only to save the taxpayer money, as the indexation on earlier accruals was achieved through an uplift in the state pension. A central reason behind why the Government made this decision is that contracting out has always been about the state and the private sector working together, and that having a set amount of indexation paid for by the scheme, with additional protection provided by the state, is a sensible balance.

Let me explain how that system works. When inflation is above 3%, as it currently is, most people with GMPs earned between those years—1988 and 1997—who reached state pension age before 2016 will receive the same inflation protection as if they had not been contracted out. This means that most people who reached state pension age before April 2016 will receive a top-up of 3.7% this year through the additional state pension. In other words, they will receive 3% from their occupational pension scheme and the remainder as a top-up through the additional state pension.

18:30

While people who reached state pension age before 2016 do not receive indexation on the GMPs that they earned between 1978 and 1988 from the scheme, this does not mean that there is no protection against rising prices. For most of these members there is again a top-up through the additional state pension, so I hope your Lordships will agree that this is a suitable balance between the state and the private sector.

For those reaching state pension age after April 2016 there is no such top-up, due to the changes made with the introduction of the new state pension. However, there are transitional arrangements, which are particularly beneficial to those who were contracted out. These members will still get the inflation rate increase— up to 3%—on their 1988 to 1997 GMPs from their occupational pension scheme and will benefit from the new state pension. Going forward, everyone who gets a state pension will receive the benefit of the new state pension, which has been protected by the triple lock, demonstrating the Government’s commitment to provide a strong foundation of support for pensioners.

That was a bit of detail, but I hope it gives the Committee a comprehensive explanation of what the GMPs are, how they work and why we need this order. In my view, the provisions in the order are compatible with the European Convention on Human Rights and I beg to move.

[Lord Davies of Brixton (Lab)]

My Lords, I feel obliged to make a contribution. As I said last year, if I was on “Mastermind” my specialist subject would be the GMP. I was waiting to pounce on the Minister if he missed anything out, but he provided a very comprehensive— I leave it to others to judge whether it was a clear—explanation of the system that applies.

The only thing I want to add is that, post 2016, retirees lose out on these increases and some of them are very angry about it. However, as the Minister indicated, they gain in other ways. The continued accrual post 2016 more than compensates for the loss of these increases—except, that is, for those who retired in the year 2016-17, because they did not get any additional accrual that counted towards their pension. I pointed that out at the time when the Act was going through but, as happens all too often, nobody listened.

[Baroness Janke (LD)]

I thank the Minister for his explanation, which was indeed very clear on a fairly complicated issue. We support this order but, at the same time, I would like to use this opportunity to raise some issues relating to pensions.

First, I welcome the Government’s support for retaining the triple lock. Although there has been a reduction of the numbers, there are still 1.7 million pensioners in poverty and the value of the state pension is still lower in the UK than in comparable countries.

The next thing I would like an update on is: what has happened about the large number of pensioners who are entitled to pension credit but do not take it up? Some of us had frequent meetings with the Minister’s predecessor about this. There were many suggestions as to how awareness could be raised and the potential benefits of the scheme promoted among poorer pensioners. Can the Minister update us on what measures have been taken to improve take-up and what level of success the campaign has achieved to date?

We also welcome the measures to expand auto-enrolment by giving powers to end the lower earnings limit and increase the eligible age range. Can the Minister provide us with a progress report on the implementation of these measures? Are the Government planning to review the rate of contribution, which quite a few people say is too low?

Have the Government taken any action on the pensions gender gap? The average pension for a woman aged 65 is one-fifth of a 65 year-old man’s, and women receive £29,000 less in state pension than men over 20 years. This deficit is set to continue, with all else being equal, closing by only 3% by 2060. What is the Government’s response to the embedded unfairness in this system? Will the Minister tell us what progress has been made in the Government’s plans to streamline tax administration, perhaps to enable low-paid workers, who are typically women, to receive pensions tax relief on their contributions?

A lack of awareness of the value of pension assets and pension complexity, as well as the increasing number of online divorces, has led to many divorced women having no pension savings at all. Women’s pension rights are much harder hit than men’s by divorce, so has any progress been made to ensure the fair sharing of pension benefits after divorce? I look forward to the Minister’s response.

[Baroness Sherlock (Lab)]

My Lords, I thank the Minister for introducing this order, and I thank all noble Lords who spoke. I say to my noble friend Lord Davies that, if I were ever to go on “Mastermind”, this would definitely not be my specialist subject. Every year I have to revise it afresh, and every year when I pick it up it is as though I have never seen it before. It is a little like the content of my physics A-level, which I could hold in my brain for the duration of the exam but which then disappeared, having left no discernible effect for the rest of my life. So I actually thought it was an incredibly clear explanation, and I commend the Minister and all those who helped him to present it—I am very impressed.

My idiot’s guide to what this does is that it tells pension schemes the percentage by which they need to uprate GMPs built up between 1988 and 1997. Some years, having done the reading, I dug deep into the technicalities of this, but this year I will ask just two rather simpler questions about it. First, I think I mostly followed the question about how much is the total benefit of uprating between different components, so how many, if any, pensioners will see below-inflation increases in their pensions as a result of the 3% cap?

Secondly, last year, I raised the way DWP deals with those who have GMPs who may have lost out when the new state pension was introduced in 2016. As we have discussed before at this stage, in 2019, the Parliamentary and Health Service Ombudsman reported on its investigation of two complaints and said that the DWP had failed to provide clear and accurate information on the issue, despite being warned, with the result that some people were not aware that they might need to make alternative provision for their retirement. The ombudsman recommended that DWP should

“review and report back its learning from our investigations”

and that, in particular, it should improve its communications on the issue.

It was August 2021 when DWP finally produced a factsheet in response on GMP and the effect of the new state pension. Last year, I asked the Minister two questions about that. First, what was the DWP doing to draw the existence of the factsheet to the attention of those who might need to know it was there? Secondly, how many people had successfully applied, or indeed applied at all, for compensation since the ombudsman’s report? I did not get any answers, either on the day or in the letter afterwards—as far as I could see.

I have been back since and crawled through the correspondence between the Select Committee and successive Pensions Ministers, of whom there have been a number. I commend the committee for its diligence in this matter. Finally, in a letter from Paul Maynard, the Minister, to Sir Stephen Timms, dated 9 January this year, I found this sentence:

“We received 50 requests for further information (between 12 August 2021 and 31 December 2023) from people who responded to the GMP factsheet”.


There was then a breakdown of those requests. But how will those figures be updated in future? Does the Minister think that 50 requests in nearly two and a half years is enough, or does it perhaps suggest the need for more proactive communication, of the kind for which the Select Committee has been calling for some years?

With the noble Baroness, Lady Janke, I would like to ask a couple of questions more broadly relating to pensions. The first is a factual question. We were due to have the latest release of national statistics on the state pension two weeks ago. They came out as part of the quarterly DWP benefit statistics release, but they seem to have been suspended. Can the Minister explain why?

On the question of pensioner poverty, also raised by the noble Baroness, Lady Janke, the Minister will know, because I say it periodically, that the last Labour Government saw a marked fall in pensioner poverty, which unfortunately then started to go into reverse when this Government came to power. Now, one in six pensioners are living in poverty. Our success was largely down to the introduction of pension credit, which ensures pensioners get a minimum level of income plus passported benefits.

As the noble Baroness, Lady Janke, said, take up is key. In January, statistics were published which looked at benefit take up. They suggest that for the financial year ending 2022, an estimated 63% of families entitled to pension credit received it. That was 3 percentage points lower than the financial year ending 2020. That suggests that there was a brief rise, but it has now gone back down to 2019 levels. Given that the Minister and his predecessor have got up and talked about how successful the pension credit take up campaign has been, have I read that correctly? Is the annual level of take up in fact going down? Please can the Minister explain that to me?

We also need to do what we can to boost the incomes of future pensioners. The noble Baroness, Lady Janke, again mentioned the Pensions (Extension of Automatic Enrolment) (No.2) Bill, which received Royal Assent with cross-party support, giving Ministers the power to abolish the lower earnings limit for contributions and reducing the age for being automatically enrolled from 22 to 18. On 18 September, the Minister told us that:

“If the House agrees to final passage today, the Government will look to play their part by consulting on how to implement the expansion of automatic enrolment at the earliest opportunity, which I hope gives some idea of the timescale to the noble Baroness, Lady Sherlock. We hope it could be later this year. We will then report to Parliament about how we intend to proceed in accordance with the provisions in the Bill”.—[Official Report, 18/9/23; col. 1201.]


When these regulations were debated in the Commons on 31 January, my honourable friend Alison McGovern asked when this would be happening and when these provisions would be put in. The Minister Paul Maynard responded thus:

“I would love to give her a date for when she will see that; “in due course” is never a good answer to give at the Dispatch Box, but I am afraid that it is the answer at this stage. However, I am pursuing this within the Department, so she has my personal pledge I am pushing it as hard as I can”.—[Official Report, Commons, 31/1/24; col. 949.]


Having pushed as hard to get that Bill through, with cross-party support, does this mean it has been kicked into the long grass? I look forward to the Minister’s reply.

[Viscount Younger of Leckie (Con)]

My Lords, I begin by thanking the three Peers who have spoken in this debate which was even than the previous one. I say at the outset that I appreciate the general support for these regulations. Regarding the GMP increase order, it is always helpful to be aware from the outset that your Lordships are generally supportive of what it sets out to do. Occupational pensions schemes help provide members of their scheme who have a GMP accrued between 1988 and 1997 with, as I said earlier, a measure of protection against inflation eroding the value of their pension.

At the outset, I will also give a very brief response to what was not really a question from the noble Baroness, Lady Janke, about the triple lock. We are pleased to confirm that the triple lock remains in place. I do not think that there was a question there, but I acknowledge that point.

There were a number of questions. I shall start off by answering in no particular order some questions raised by the noble Lord, Lord Davies of Brixton. As to the very specific question of how many people who contracted out will be worse off because of the loss of GMP indexation through the state scheme—he particularly mentioned 2016-17—people who reach state pension age after April 2016 will be entitled to the new state pension and will receive up to 3% from the scheme on their 1988-1997 GMP, which he will know. When looking at the reforms in the round, people may not lose out in aggregate terms because, in effect, indexation has ended for people reaching state pension age from 6 April 2016. This is because the transitional rules of the new state pension can be particularly advantageous for people who have been contracted out.

18:45

The noble Baroness, Lady Janke, asked about the take-up of pension credit. We continue to maximise opportunities to raise awareness of pension credit, which provides vital financial support to households on low incomes. Our pension credit communications campaign, which noble Lords will probably know about, has been ongoing since April 2022. It has included advertising on national TV, newspapers, broadcast radio, social media and internet search engines, as well as on screens in post offices and GP surgeries. We have also used sponsored advertising on targeted websites that pensioners, their families and their friends are likely to visit.

The latest so-called campaign burst began on 5 February and coincided with the final cost of living payments. As on previous occasions, we are letting people know that it is not too late to apply for pension credit and that they will still qualify for a cost of living payment thanks to the pension credit backdating rules. The final date to make a successful backdated claim and still be eligible for a cost of living payment is 5 March.

There is a strong indication that the campaign has had a positive impact. The number of claims received in the financial year 2022-23 was more than 80% higher than over the same period the year before. The latest available figures covering the three months to August 2023 show a slight decrease in the overall pension credit case load. However, the guarantee credit case load—the main safety net—increased in August 2023 and is now higher than it was in May 2022 at the beginning of the campaign. The pension credit case load as a whole is now greater than it was in May 2022.

Finally, over the next few weeks, the department will write once again to over 11 million pensioners as part of the annual state pension uprating. The accompanying leaflet includes information promoting pension credit using call-to-action messaging from the communication campaign, including how pension credit opens the door to other financial help, such as help with housing costs, council tax and heating bills.

The noble Baronesses, Lady Janke and Lady Sherlock, raised an important point about pensioner poverty. They must both know that the Government are committed to action that helps to alleviate levels of pensioner poverty. The latest statistics show that 200,000 fewer pensioners are in absolute poverty after housing costs since 2009-10. We will spend £22 billion in 2023-24 on increasing state pension and benefit rates. This includes £13 billion more to be spent on pensioner benefits, state pensions and pension credit. We are providing total support of over £94 billion over the period 2022-23 and 2023-24 to help households and individuals with the rising cost of bills. The pension credit standard minimum guarantee was also increased by 10.1% in April 2023. Parliament has just approved a further increase of 8.5% in April 2024.

The noble Baroness, Lady Janke, raised the gender pensions gap. Automatic enrolment has helped millions of women to save into a pension, with pension participation rates among eligible women in the private sector rising from 40% in 2012 to 86% in 2022, which is equal to men eligible for AE in the private sector.

In June 2023, DWP published an official measure of the gender pensions gap, which is currently 35% in private pensions. When considering only those who are eligible for automatic enrolment, the gap is smaller and stands at 32%. The publication of an official annual measure will help us track our collective efforts in government, industry and employers to reduce the gender pensions gap, which is an important matter.

The noble Baroness, Lady Sherlock, asked how many pensioners are seeing below-inflation increases in their pensions as a result of the 3% cap. People who reached state pension age before 6 April 2016 and have a GMP earned between April 1988 and April 1997 will receive indexation from their scheme on this GMP capped at 3%. If inflation is above 3%, they may be eligible for a top-up balance paid through the additional state pension—I have said all this already.

Some members of schemes that were contracted out have accrued GMPs that are worth more than the additional state pension they would have got had they stayed in the state system. This is usually because they are a deferred member with a preserved GMP that has been revalued through the fixed-rate revaluation method. People reaching state pension age after April 2016 will still receive an increase from their scheme, capped at 3%, on GMPs earned between April 1988 and April 1997.

The additional state pension was replaced by the new state pension from April 2016 and the top-up ended. However, transitional arrangements that can be particularly beneficial to people who were contracted out are in place. Some scheme members can be more than £40 a week better off because of this. To answer the noble Baroness’s question, the department does not hold data on the exact numbers affected; that is where I am on this. If there is any change there, I will certainly write to the noble Baroness.

The noble Baroness, Lady Sherlock, asked how many people have successfully applied, or applied at all, for compensation since the PHSO report in August 2021, when my department published a fact sheet on GMPs, including the effect of the new state pension. As she mentioned, between August 2021 and December 2023, the department received 50 requests for further information from people who responded to the fact sheet. In response to the noble Baroness’s question, one person has applied for compensation; they received a payment of £250. The noble Baroness may like to know that the level of compensation awarded to the individual is in line with the amount recommended by the ombudsman.

The noble Baroness asked what action the department is taking to make people aware of the existence of the fact sheet; I thank her for that question. As she will be aware—she alluded to this in her remarks, I think—the Minister from the other place wrote to the chair of the Work and Pensions Select Committee in January about the fact sheet. This response set out the details of the 50 people who sought additional information.

As explained in that letter, this is a complex issue and we are aware that there are many people who do lose out on “in effect” indexation. However, most members who reach state pension age before 2016 will receive the same inflation protection as if they had not been contracted out. Those who reach state pension age after 2016 will still receive a 3% increase on GMPs earned between 1988 and 1997 from their scheme. They will not get the additional top-up through the state system.

Having considered the outcomes from customer-requested reviews and the fact that the triple lock has changed pension outcomes significantly, we do not think that further work to raise awareness of the fact sheet is necessary at this stage. We will, however, continue to keep this area under review. I hope that that provides some help.

[Baroness Sherlock (Lab)]

I just want to understand that response. It does not sound like very many. I presume what the Minister is trying to say to the Committee is that, having looked at the denominator of how many people might expect to be eligible and how much they might get, that number does not feel disproportionate. Is that what he is saying?

[Viscount Younger of Leckie (Con)]

Yes—that is absolutely right. Let me see whether there is any further information that I can get to the noble Baroness on this niche matter. If I am wrong, I will write, but I will certainly write anyway. I am coming towards the end of my remarks; I have only a couple more questions to answer.

The noble Baroness, Lady Sherlock, asked where she might find the latest state pension statistics. As she may know, they are available on Stat-Xplore, but only up to May 2023. The release of updated statistics due to be published on Tuesday 13 February 2024 was suspended, as the noble Baroness alluded to in her remarks. This delay results from issues with the internal processing of state pension data after it was sent for analysis from the “Get your State Pension” system and has an impact only on statistics that are not yet published. State pension statistics previously published on Stat-Xplore in November 2023 remain reliable. Work is under way to remediate these issues, and we will publish the suspended state pension statistics as soon as we are able.

The noble Baroness also asked about the status of the auto-enrolment extension Act’s powers and the consultation. The Government remain committed to expanding the benefits of AE to younger people and helping all workers to save more for their retirement. This is why we supported the Pensions (Extension of Automatic Enrolment) Act 2023, to which the noble Baroness alluded. To cut to the quick, we intend to conduct a consultation on the detailed implementation of these measures at the right time and in the right way. That is probably not in line with what my colleague in the other place said—“in due course”—but our commitment stands to implement in the mid-2020s.

With those remarks, I will, as ever, check in Hansard that I have attempted to answer all the questions asked. The Committee should be reassured that, if I have not done so, I will write. In the meantime, I thank all three Peers for their interest.

Motion agreed.

Committee adjourned at 6.55 pm.