Guaranteed Minimum Pension (GMP): What It Is, How It Works, and Why It Still Matters

Here, we look at guaranteed minimum pension (GMP) including what it is, when it accrued, and how it might impact vesting of retirement benefits. This article is of relevance to anyone sitting CII AF7, R04, J05 or FA2.

This article is correct as at 26 August 2025.

Those of you studying for any CII pensions exam have probably heard the term GMP. You may even be able to describe the treatment of its benefits in terms of payment, revaluation, and escalation. But how many really understand the finer details of what it is and where it comes from?

You could certainly be forgiven for not doing so. After all, GMP accrual ceased for new benefits with effect from 6 April 1997, which is now 28 years ago. This means anybody under about their mid-forties won’t have experienced it first-hand. However, even though schemes with GMP entitlement are becoming rarer with the passage of time, a good working knowledge of it is still a useful thing to have.

What is Guaranteed Minimum Pension (GMP)?

GMP, or Guaranteed Minimum Pension to give it its full title, originated in 1978 and was available to members of defined benefit pension schemes. A member of an appropriate scheme was entitled to contract out of the State Earnings Related Pension Scheme (SERPS). SERPS was an earnings based additional state pension entitlement in place at the time, towards which additional national insurance contributions were paid based on the member’s qualifying earnings.

Contracting out effectively allowed those contributions to be redirected into the occupational defined benefit scheme. In return, the scheme had to undertake to provide a minimum level of benefits on retirement, which would at least replicate the benefits which would have been earned under SERPS. GMP accrual ceased as of 6 April 1997.

Defined benefit scheme members are entitled to have their benefits increased in line with inflation both in between leaving the scheme and retirement (revaluation). They are also entitled to have them increased annually in payment (escalation).

How GMP Revaluation Works

GMP benefits can be revalued in two main ways depending on the rules of the scheme at the time. The first is in line with national average earnings, via what is known as a section 148 order, which are made on an annual basis. The more common way is in line with a fixed rate which is determined by the date the member left the scheme and changes on a five-yearly basis.

It is important to note that for leavers prior to the turn of the century, those rates are very generous. They can be anything from 6.25% all the way up to 8.5% per annum, the latter being for pre-1988 leavers.

Whilst these members are becoming less and less common, that is an extremely generous figure and significantly in excess of any inflationary or national average earnings figure you are likely to find today. It is also guaranteed on an annual basis.

For example, let’s say a member left the scheme in 1987 with a GMP entitlement of £2,000 per annum and reached GMP age in 2025 (unlikely but possible). That entitlement would be worth a whopping £44,397 on retirement.

For leavers prior to 1997, there was a less common third way in which schemes using the average earnings method of revaluation could pay a limited revaluation premium. This would limit the scheme’s liability for increases to 5% per annum, with the state picking up any excess if the section 148 order exceeded that threshold.

Escalation of GMP Benefits in Payment

GMP also has its own specific escalation in payment rates. These are less generous than the revaluation rates.

• Pe-88 GMP – The scheme does not have to pay any annual increase, though the rules may provide for it to do so.
• Post-88 GMP – The scheme is required to pay escalation up to 3% per annum, with the state picking up any surplus.

Why GMP Still Matters for Pension Planning

It is, however, important to note that GMP is relatively inflexible. It is payable from a specific age, known as GMP age. That age was historically 65 for men and 60 for women. However, this has recently been the subject of an equalisation exercise on the grounds of sex discrimination.

In addition, GMP cannot be commuted for tax-free cash. This means that if a member’s scheme offers tax-free cash by commutation and contains a significant element of GMP then it may not be able to pay the full 25% entitlement.

Finally, where the member takes scheme benefits early, an early retirement reduction will usually apply to the overall value of the scheme benefits. However, the scheme must still pay at least the revalued GMP from the member’s GMP age.  This means the GMP acts as a “floor” below which total benefits cannot fall. A member’s ability to take benefits early may therefore be impacted if the early retirement reduction would otherwise reduce benefits below the GMP value.

What Happens if a Scheme is Wound Up?

Where the scheme has been wound up then the entitlement may have been transferred to a section 32 buyout plan. This throws up more interesting possibilities, which we will look at separately in a future article.

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