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The Actuary The magazine of the Institute & Faculty of Actuaries
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Public service pensions

There is at least one other way inwhich public sector pensioners(including MPs of course) get anadvantage over other pensioners.(Re article in May’s issue and letters,June to August.)Anyone who was in a contracted-out scheme between 1978 and 1988 will have an elementcalled guaranteed minimum pension(GMP). This part of the pensionis not indexed along with therest of the pension. Instead, thestate scheme compensates for themissing indexation by calculatingan additional pension using thesame formulae as are used for aSERPS pension, but then deductinga flat amount which it labelscontracted-out deduction (COD).The COD is usually the sameamount as the GMP.All goes well so long as the pensionercontinues to live in the UKor any other country where UKstate pensions are indexed, such asthe US; the total pension receivedfrom the two sources, scheme andstate, is the same as if the schemeindexed the whole pension.If the pensioner decides to emigrateto a country where UK pensionsare ‘frozen’, the state nolonger increases the SERPS withinflation, and hence the GMP iseffectively frozen.There is an exception where thepension is being paid from a publicsector scheme. In this case thestate directs the occupational pensionpayer henceforth to index thewhole pension, not excluding theGMP. The benefit of this rule isenjoyed only by public sectorpensioners.In practice, the state is notalways diligent about instructingthe pension scheme managers. Inone recent case a lady who hadearned a pension in the teachingservice came to Australia on retirement20 years ago. She has onlyrecently found out about the specialtreatment to which she oughtto be entitled. She has now beengiven a fully uprated occupationalpension, plus back pay of over£10,000 plus interest.There could be many other publicsector pensioners who havenever been told about this privilegedtreatment.Regarding the liability for publicsector pensions, Robert Thomsonand Neil Record are both right inthat the liability for these pensionsought to be regarded as part of thenational debt. The National InsuranceFund is a real fund, separatefrom consolidated funds, and havingits own investments in gilts.Nevertheless many MPs, includingeven ministers, try to pretend thatit is all just government money. Soif public sector schemes wereproperly funded and had theirown investments, the governmentwould probably still try to get itshands on the money.