Contracting out - fixed rate GMP revaluation to increase to 4.75% from 2012

The DWP has issued a consultation on two sets of regulations concerning contracting-out. These cover proposals to:

  • Increase the GMP fixed revaluation rate to 4.75% (from 4%) for leavers from 6 April 2012; and
  • Allow trustees of formerly contracted-out defined contribution occupational pension schemes to change their scheme rules to take into account the abolition of protected rights after 6 April 2012. From this time protected rights become ordinary scheme benefits, and this proposal should make is easier to modify scheme rules without worrying about issues such a section 67.

Responses are welcomed up to 6 November 2011.

Comment
The fixed GMP revaluation rate affects schemes with active members who contracted out via the GMP method (which ceased in 1997) and who revalue by using the "fixed" method rather than the (less common) Section 148 method. The actual fixed rate has been reviewed every 5 years in recent times, with the current rate of 4% p.a. in operation since April 2007.

The proposed 0.75% pa increase will increase costs in respect of any leavers who leave contracted-out active service after next April so schemes who are thinking of ceasing accrual (or maintaining accrual but ceasing to contract out) around that time should consider this issue. In particular, ensuring that accrual ceases before 6 April next year as opposed to just after could have a financial impact that employers should be aware of. To give an example, if a 50 year old male leaves service on 6 April 2012 with 20% of his pension as GMP then his overall pension would be more than 2% higher at age 65 as a result of this change.