A SERPS adjustment can only apply to an individual who has some Guaranteed Minimum Pension (“GMP”) – in other words who has some contracted-out employment – and then only if any part of that GMP is subject to fixed rate revaluation – it is this situation that this note is concerned with. Contracted-out employment first became available in 1978.
A SERPS adjustment cannot apply to an individual who has no GMP and it cannot apply to an individual whose GMP is wholly revalued according to earnings – often referred to as section 148 orders or (a previous name) section 21 orders. Some individuals who have GMP with fixed rate revaluation should also escape a SERPS adjustment, in full or part, but unfortunately there is widespread bad practice in this respect as the individual position is not fully established by the firm responsible for paying compensation.
While an individual was an active member of a contracted-out scheme his GMP was automatically revalued according to earnings. When he ceased to be an active member before retirement age – in other words he became a deferred member – the scheme had an obligation to continue to revalue his GMP that had already accrued, until retirement age, which could be many years in the future.
Many private sector schemes were concerned at the open-ended financial obligation to revalue the GMP according to earnings (remembering that there had been persistent high inflation in the latter part of the 20th century) so a political decision was made to allow a scheme to choose fixed rate revaluation instead when an active member became a deferred member and many private sector contracted-out schemes chose this.
The issue of the SERPS adjustment only applies to deferred members of such schemes who subsequently transfer the benefits to a flexible pension, and some of those will escape a SERPS adjustment or only have a reduced SERPS adjustment, depending on their full employment history. A SERPS adjustment cannot apply to any other individual.
The maximum SERPS adjustment is the difference between revaluing any deferred pension that is subject to fixed rate revaluation, first as if the revaluation was according to earnings and second based on the fixed revaluation rate. The first result is usually smaller than the second and the difference is the maximum SERPS adjustment – that is applied by reducing the redress amount but only where an individual’s employment history means that can be done. As with all calculations relating to the state pension they assume the rules remain the same whereas rules can be changed. We have seen many cases where a SERPS adjustment – a reduction in redress – has been applied with no enquiry into individuals’ employment history – we describe this as bad practice.