Annex A

Annex A

Dear Mr White,

I am writing regarding your request for information, which was received on 25 June 2009. In that request, you asked:

Could you please provide a copy of the rules (or an explanation of
the rules) used to calculate Additional State Pension based on
earnings from 6 April 1978 to BEFORE 5 April 1997 (where earnings
for most years are above LEL):

- that is for persons who drew their state pension from state
retirement age where payment commenced prior to 5 April 1997
(before the Pension Act 1995 came into force);

- where at least one year their earnings were above the LEL and
were contracted-out;

- where at least one year their earnings were above the LEL and
were contracted-in.

Since the Pension Act 1995 came into force, the COD deduction has
been applied to additional pension earned during the whole period
between 6 April 1978 and 5 April 1997, irrespective of whether the
earnings were contracted-out or contracted-in. I wish to establish
if this was the case before the Pension Act 1995 came into force.

Also, are you able to clarify if the method of calculation changed
during the period 6 April 1978 and 5 April 1997, and if so the
nature of the changes?

The State scheme has always provided for a person's additional pension to be adjusted by the amount of the GMP or COD that has been built up as an alternative to State scheme rights - see Section 29 of the Social Security Pensions Act 1975, for ease of reference I have provided an extract below.

the weekly rate of the benefit mentioned in paragraph (a) above shall for that period be reduced by an amount equal to its additional component or, if less, an amount equal to the weekly rate or aggregate weekly rates of the pension or pensions mentioned in paragraph (b) above.

The additional pension was introduced in April 1978 and normally referred to as the State Earnings Related Pension Scheme (SERPS). From April 2002, the Government reformed SERPS and introduced State Second Pension (S2P). When SERPS was introduced in 1978 it was originally designed to reflect the best 20 years of earnings someone would build up in the scheme and provide that person with a pension of 25% of those earnings.

It has always been possible for employees to contract-out of the additional State Pension scheme by joining an occupational pension which meets certain conditions instead. From 1988, it has also been possible to take out a personal pension, instead of the additional State Pension.

For members of salary related schemes, the schemes must offer a pension at least as good as the SERPS given up. This pension is known as the Guaranteed Minimum Pension (GMP). The GMP ceased to accrue from April 1997, although entitlement to accrued rights still exists.

For people in a contracted-out money-purchase scheme or an appropriate personal pension scheme no actual GMP was earned but the person is treated as if it had been. This is referred to as a contracted-out deduction (COD) and the amount is calculated in the same way as a GMP.

People who are contracted-out pay lower National Insurance contributions or receive a rebate of National Insurance contributions which is paid into the pension scheme. For people who are contracted-out, any additional pension will normally be reduced, often to nil.

The Social Security Act 1986 made the following changes to the additional pension, and also changes to the contracting out rules which were effective from 1988.

It modified SERPS for those reaching state pension age from 1999 onwards by gradually reducing the accrual rate from 25% to 20% of reckonable earnings between April 2000 and April 2010 and replacing the `best 20 years' provision with entitlement assessed on earnings averaged over the whole working life (post 1978). It also reduced inheritance rights to 50 percent in line with private pension schemes for deaths after 5 April 2000.

It also allowed a person to contract out through an appropriate personal pension and reduced the GMP accrual rate from 25% to 20%; extended GMP inheritance rights to widowers; and provided for GMPs built up after 1988 to be inflation proofed by schemes once in payment by the lesser of prices or 3 percent.

The rules on additional pension and contracting-out were subsequently consolidated into the Social Security Contributions and Benefits Act 1992 and the Pensions Schemes Act 1993, respectively.

Further changes were made in the Pensions Act 1995 including a technical change in the way in which SERPS entitlement is calculated (known as annualisation of SERPS) for people attaining pensionable age after 5 April 2000.

The 1995 Act also broke the link between contracting out and additional pension entitlement from 6 April 1997, in effect restricting the SERPS/GMP offset to entitlement built up prior to this date.

Details on the calculation of additional pension can be found in volume 12 of the Decision Makers guide, specifically from 75551 onwards in chapter 75 - Retirement Pension. The Decision Makers guide is published on the DWP website under specialist guides and publications.

If you have any queries about this letter please contact me quoting the reference number above.

Yours sincerely,

DWP Central FoI Team

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Your right to complain under the Freedom of Information Act

If you are not happy with this response you may request an internal review by e-mailing [DWP request email] or by writing to DWP, Central FoI Team, 2^nd Floor The Adelphi, 1-11, John Adam Street, London WC2N 6HT. Any review request should be submitted within two months of the date of this letter.

If you are not content with the outcome of the internal review you may apply directly to the Information Commissioner's Office for a decision. Generally the Commissioner cannot make a decision unless you have exhausted our own complaints procedure. The Information Commissioner can be contacted at: The Information Commissioner's Office, Wycliffe House, Water Lane, Wilmslow Cheshire SK9 5AF www.ico.gov.uk

DWP Central Freedom of Information Team

e-mail: [DWP request email]

Our Ref: VTR 1237

DATE: 08 July 2009