Guaranteed Minimum Pensions Increase Order 2024
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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.
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.
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.