DWP and state pension: Contracted-out members reminded of inflation timebomb

The Department for Work and Pensions is being urged to do more to let an estimated 11 million UK savers know that they may be as much as £20,000 worse off because part of their state pension was not linked fully to inflation.

The issue is believed to affect people who contracted out of the state pension to join their employer's defined benefit scheme between 6 April 1978 to 5 April 1997.

The state pension element of their pension, known as guaranteed minimum pension (GMP) was not indexed with a cap at three per cent on what is known as post 1988 GMP.

All the pre 1988 GMP contributions and anything in excess of threer per cent on post 1988 GMP used to be paid by the state.

The issue is only believed to affect those in private DB schemes as those in public sector schemes had the GMP part of their pension inflation linked.

Guaranteed minimum pension

Anyone who retired on and after 6 April 2016 could be affected by the change.

A campaigner who did not want to be named pointed out that the issue only affected those in private schemes as those in public sector schemes had the GMP part of their pension inflation linked so they didn’t miss out on any inflation rises.

The campaigner said the Department for Work and Pensions needed to have done more to make people aware that their GMP had not kept up with inflation.

Public service schemes

The campaigner also alleged that a decision not to link the pension to inflation should have been decided by MPs but appears nowhere in the statute books.

“This was almost two years after the parliamentary ombudsman report where they were found guilty of maladministration for not mentioning loss of GMP indexation to parliament or the public.”

The campaigner said: “They did not want people to know that they would not receive GMP indexation and that public service pension schemes were being treated more generously as their pension schemes were being made to take over payment of GMP indexation previously paid by the DWP– and that the law was not changed to cease paying GMP indexation.”

The campaigner said: “The new state pension became law in about May 2014 or before the new state pension started on 6 April 2016."

“The DWP did not make information about GMP indexation not being paid under the new state pension public until 12 August 2021 which was over six years after it had become law. 

The campaigner added: “Why did they not issue information soon after it had become law. I wonder how many people have looked at the fact sheet and how many people have contacted them in response to the fact sheet."

A DWP spokesperson said:  “We encourage anyone who is concerned to read the online factsheet on the changes - the Guaranteed Minimum Pension (GMP) and the effect of the new State Pension - GOV.UK - and contact us if they think they have been affected. “The publication of the factsheet is the final step in the Department meeting the Ombudsman’s recommendations on this issue."

The spokesman added: "These changes only affect people who reached state pension age from 6 April 2016 who can benefit from the transitional rules of the new State Pension.

"The new state pension system was introduced in 2016 to provide a sustainable, clear foundation pension for people to build their private savings on top of. No one who qualifies for the new State Pension will receive less than they would have done under the previous system, based on their National Insurance record up to 6 April 2016. 

"The factsheet describes the factors involved in this complex policy area and invites people to contact the Department if they want to know how they have been personally affected by the policy change."