Revaluation for Early Leavers

Published by Julian Mainwood on

When a member of a final salary pension scheme leaves having completed at least 2 years’ service, they become entitled to a preserved pension in respect of the benefits that have accrued during their membership of the scheme.  The preserved benefit remains in the scheme until the member retires, dies or decides to transfer the benefit elsewhere.

In order to prevent the value of a preserved benefit diminishing over time through the effect of inflation, revaluation was introduced to preserved benefits.

The benefits earned and the revaluation applied is dependant on the rules of the pension scheme and the legislation in place at the time.  It is therefore important to have an understanding of the historical position that applied to such individuals.


Key legislation and dates

Legislation Effective Key features
Social Security Act 1973 6 April 1975 Introduced preservation – members had to be over age 26 and have at least 5 years qualifying service to qualify for preserved benefits.
Social Security Act 1985 Leavers on or after 1 January 1986 Introduced revaluation to preserved benefits in excess of Guaranteed Minimum Pension (GMP) earned after 1 January 1985.
Social Security Act 1986 6 April 1988 Qualifying service for preserved benefits reduced from 5 years to two years.
Social Security Act 1990 Leavers on or after 1 January 1991 Revaluation extended to cover the whole of the member's pension, in excess of the GMP.  Annual increase applicable was the increase in the Retail Price Index (RPI), capped at 5% (sometimes known as 5% Limited Price Indexation - LPI).
Pensions Act  2008 Post 6 April 2009 accrual Allowed schemes to reduce the revaluation percentage from RPI capped at 5% a year (as above) to RPI capped at 2.5% for pensions accrued after 6 April 2009.
Pensions Act 2011 6 April 2011 Consumer Prices Index (CPI) replaced RPI as the basis for the minimum statutory revaluation.  Rules for the pension scheme will determine whether this change was applied to benefits.

Revaluation of benefits in excess of Guaranteed Minimum Pension

Preserved benefits in excess of Guaranteed Minimum Pension (GMP) must be increased for each complete year in the period of deferment.  The increase applied is notified each year when the Secretary of State makes an Occupation Pensions (Revaluation) Order (known as Section 52a orders).  Each revaluation period begins on a 1 January and ends on the 31 December prior to the order coming into effect.

The factor to apply for a preserved member retiring in 2012 will be that for which the revaluation period contains the same number of complete years as the period of deferment.  If we take the following scenario*

  • member's date of leaving is 30 January 2004
  • normal retirement date (NRD) 5 January 2012

There are seven complete years between date of leaving and normal retirement date.  The target is therefore the 2012 and 7 Years in the table below.  In this example, the increase applicable is 24.1%

Year

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

Complete years

1 Complete Year

5

3.1

0

5

3.9

3.6

2.7

3.1

2.8

1.7

1.7

2 Complete Years

8.5

1.7

3.5

9.1

7.6

6.4

5.9

6

4.5

3.4

5.1

3 Complete Years

6.9

6.7

7.6

13

10.5

9.7

8.8

7.8

6.3

6.8

6.2

4 Complete Years

12.3

10.9

11.4

16.1

14

12.8

10.7

9.6

9.8

8

9.6

5 Complete Years

16.7

14.9

14.4

19.7

17.2

14.7

12.6

13.2

11

11.5

13.6

6 Complete Years

20.9

18

18

23

19.2

16.6

16.3

14.5

14.6

15.5

15.9

7 Complete Years

24.1

21.7

21.3

25.1

21.2

20.5

17.6

18.1

18.7

17.9

20.5

8 Complete Years

28

25.1

23.4

27.2

25.2

21.8

21.3

22.4

21.2

22.5

23.1

*In the example shown, it is assumed that the Scheme has adopted CPI revaluation to all benefits and has not reduced the revaluation to 2.5% for benefits accrued post 6 April 2009.

How much of a member’s benefits are subject to revaluation by Section 52 orders is dependent on when the member became preserved as shown in the following table:

Date of leaving Revaluation
Before 1 January 1986 No revaluation on benefits in excess of GMP.
From 1 January 1986 to 31 December 1990

No revaluation on benefits in excess of GMP earned prior to 1 January 1985.
Section 52a orders on benefits in excess of GMP earned after 1 January 1985.

On or after 1 January 1991 Section 52a orders on all excess pension.

Revaluation of Guaranteed Minimum Pension 

Any GMP element of a preserved pension must also be revalued, but the method is different to revaluing excess benefits.  Currently, trustees have the choice of two different methods of revaluing GMPs: Full Rate increases or Fixed Rate increases.  Schemes which opt for increases at Full Rate increase their GMPs annually in line with Section 148 Orders (previously known as Section 21 Orders). Section 148 Orders are based on the increase in the National Average Earnings Index each year.

Fixed Rate revaluation increases are determined by the date of termination of pensionable service.  The annual percentage increase is fixed and depends on the date of leaving as follows:

 Date of Leaving  Annual Percentage Increase
 Between 6 April 1978 and 5 April 1988  8.50%
 Between 6 April 1988 and 5 April 1993  7.50%
 Between 6 April 1993 and 5 April 1997  7.00%
 Between 6 April 1997 and 5 April 2002  6.25%
 Between 6 April 2002 and 5 April 2007  4.50%
 Between 6 April 2007 and 5 April 2012  4.00%
 After 6 April 2012  4.75%

The revaluation period for GMPs is the number of complete tax years between a member's date of leaving and their GMP Pension Age. For members retiring before they reach GMP Pension Age, the revaluation period for GMPs would normally be the number of 6 Aprils between the two dates. 

Furthermore, if a members actual retirement date is after their GMP Pension Age then statutory late retirement increases will apply to the GMP. 

For further information on GMPs please see our article What is a GMP? 


Defined contribution schemes

Statutory revaluation does not apply to defined contribution arrangements.  Instead, any investment returns earned by a member's money purchase fund after they have left the scheme must be used to provide additional benefits for the member.  Administration expenses can be deducted but these must not be greater than the expenses that would have applied if the member had remained in service. 

More information

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