Revaluation for early leavers

What trustees and sponsors of pension schemes need to know about revaluation for early leavers

When a member of a final salary pension scheme leaves, having completed at least two 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

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%

*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:

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:

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 six Aprils between the two dates. 

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

For further information on how we help trustees and sponsors achieve their GMP objectives, please see our range of services for GMP projects. 

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.