Guaranteed minimum pension
Pensions - UK - contracting out.
Between 1978 and 1997, UK contracted-out pension schemes were required to provide a Guaranteed Minimum Pension (GMP).
Since 1997, a different test has applied, but contracted-out schemes still have to provide a GMP for pension rights accrued between 1978 and 1997.
Background: UK State Pension
The UK State Pension for people who reached state pension age before 2016 had two tiers:
- The basic State Pension – to which workers built entitlement on the basis of their National Insurance record; and
- The additional State Pension – which was partly earnings-related.
From the time the additional UK State Pension was introduced in 1978, it was possible to contract-out of it into a pension scheme that met certain criteria.
Where an employee was in a contracted-out scheme, they and their employer paid a reduced rate of National Insurance, designed to reflect the cost of providing the benefits foregone.