This article should be read carefully if you will not have reached State Pension Age by 5 April 2016. If you are already in receipt of a State Old Age Pension on 5 April 2016, you are not affected.
By now, most of us should be aware that the state pension system is being reformed from April 2016. The current two-tier system with the basic state pension and SERPS (now known as the state second pension) will be replaced by a new simplified single-tier state pension.
At the same time, contracting out for all defined benefit pension schemes ceases, the effect of which for active members of APS & NAPS was outlined in the December newsletter.
From 6th April 1978, employers and employees were permitted to contract-out from SERPS provided their occupational pension scheme met a set of criteria known as Guaranteed Minimum Pension (GMP). This reduced state expenditure on SERPS and the benefit in return was a reduction on employers’ and employees’ National Insurance contributions. This was attractive enough to cause concern about the government being able to process the considerable number of applications in time for the start of the new tax year.
British Airways contracted out APS as it readily met the GMP criteria. Subsequently, when NAPS was introduced in 1984, it too was also contracted out right from day 1. Those of us who currently receive APS or NAPS pensions or who will eventually receive APS or NAPS pensions and reach state pension age on or after 6 April 2016 will have part of their annual BA pension inflation rise reduced. Those who reached state pension age before 6 April 2016 are not affected. Here is a summary of what we think will happen and a few examples.
Being contracted out, APS and NAPS have to guarantee to pay their members a pension from the qualifying GMP age (65 for men, 60 for women) of at least as much as the earnings-related State benefit they would have built up had they not been contracted out. This amount is known as the Guaranteed Minimum Pension. GMP is not in addition to our APS/NAPS pension but included within it.
GMPs cover two periods:
• Pre 88: 6 April 1978 to 5 April 1988
• Post 88: 6 April 1988 to 5 April 1997
If you did not work for BA in these periods, your APS/NAPS Pension is not affected.
For those reaching State Pension Age on or after 6 April 2016, once they reach GMP age, APS/NAPS will no longer be responsible for increasing Pre 88 GMPs, and for Post 88 GMPs APS/NAPS is only responsible for any increases due up to 3% a year.
Under the current State Pension arrangements, from State Pension Age (SPA) the State assesses the earnings related pension that would have applied had the member not been contracted out (referred to as the Additional Component (AC)). When the State pays annual increases, the increases apply to the total AC amount which in effect broadly provides for increases on an amount equivalent to the Pre 88 GMP and any increases over 3% a year on the Post 88 GMP. These increases apply from the state pension age rather than the GMP Age. As SPA can be later than GMP Age, there can already, under current State Pension arrangements, be a period of time during which the GMP portion of an APS/NAPS pension is not receiving equivalent increases from the State.
The introduction of the New State Pension (NSP) from 6th April 2016 removes the concept of contracting out and the AC, and replaces these benefits with a single flat rate State Pension. Consequently, as there will no longer be an earnings related element of the pension, the State will no longer apply annual increases in the manner described above. Future increases will instead be applied by the State to the NSP amount. APS/NAPS will continue to pay increases required by legislation on GMP amounts until GMP Age.
BA Pensions say the Government maintains that most individuals will be better off under the new arrangements: the NSP is higher than the current State Pension and both now will rise with a ‘triple lock’ guarantee (the highest of the CPI increase, the increase in National Average Earnings, or 2.5%). The Government believes that these two elements will, for most members, mitigate the loss caused by the State no longer increasing the relevant amount to one’s GMP.
However, APS/NAPS members reaching State Pension Age shortly after April 2016 will have limited time to build up NSP by paying National Insurance (NI) contributions or securing NI credits. There is an obscure calculation applied that seems to result in many who contracted out receiving a state pension amount equivalent to the old state pension, not the higher new state pension!
This is all very complicated, so here are some real examples.
Persons A, B and C worked for BA over a time period that included the entire Pre88 and Post88 periods (ie 6 April 1978 to 5 April 1997). Their Pre 88 GMPs are £2,938, £2,610 and £1,887 respectively. From 6 April 2016 that amount of their annual APS pension will rise by 0%, not CPI, once they have reached GMP age (this remains 65 for men, 60 for women), for the rest of their lives. Their Post 88 GMPs are £1,885, £2,040 and £1,628 respectively. From 6 April 2016 that amount of their APS pension will rise by CPI capped at 3%, once they have reached GMP age, also for the rest of their lives. Person A is 65 this August. If he lives another 20 years and CPI inflation is always 2% a year, he would lose about 3.6 months’ APS pension due to the GMP effect. If he lives another 20 years and CPI inflation is always 4% a year, he would lose about 9.2 months’ APS pension due to the GMP effect.
Person A and Person B reach state pension age in August 2016 and November 2016 respectively. Both their state pension quotes from the Department of Work and Pensions are at the old (ie current) state pension level, not the new state pension, due to their contracting out.
These 3 examples have good APS pensions. The ABAP committee is more concerned about those on lower APS/NAPS pensions. If their GMP is a higher proportion of their total APS/NAPS pension than our 3 examples, then the GMP effect will be bigger; more months’ pension will be lost than the 3.6 months (2% CPI inflation) or 9.2 months (4% CPI inflation) for Person A.
BA Pensions stresses that the APS/NAPS rules have not been changed. The change has been made by the Government, not the BA Pension Trustees. BA Pensions is liaising with the Pensions and Lifetime Savings Association and the Department of Work and Pensions on this issue.
In summary, if you reach state pension age on or after April 6 2016:
• Your full APS & NAPS pension will increase by whatever annual rises are applied, up to age 65 for men and age 60 for women
• Subsequently, the GMP built up from 6th April 1978 to 5th April 1988 will cease to increase and the GMP built up from 6th April 1988 to 5th April 1997 will increase by a maximum of 3% per year.
• Having been contracted out, BA staff will most likely begin with an entitlement to the foundation rate of the new state pension (currently around £116 per week). Up to state pension age, additional state pension can be earned (up to the full amount, expected to be around £155 per week) by making qualifying National Insurance contributions from any form of UK employment.
While reform aimed at simplifying a complex pension system is welcome, it’s apparent that there are significant losers in the process. Of particular concern is the discriminatory nature of the GMP ages for men and women.
The GMP calculations are complex and members who are affected by this are advised that whilst BA Pensions should be able to give general guidance on what their individual position may be on reaching GMP age, specific personal projections cannot be provided because not all the factors involved in individual calculations will be known. In a low inflation era, the effect of GMP may seem insignificant but as we well know from the RPI vs CPI debate, the effect of compounding is considerable. Should inflation increase, then the effects of GMP become very much greater.
If you want to contact The Department for Work and Pensions for questions about the new State Pension or to ask for a statement you can ring the number shown in this link: https://www.gov.uk/future-pension-centre, Monday to Friday between 8am and 6pm.