[2005] UKSSCSC CP_375_2005 (04 October 2005)
CP 375 2005

DECISION OF THE SOCIAL SECURITY COMMISSIONER

1	I dismiss the appeal by the claimant and appellant (“Mr D”). He is appealing with my permission from a decision of the Aldershot appeal tribunal on 14 September 2004. 

2	Mr D asked for an oral hearing of his appeal. It is unfortunate that the technical adviser to the (then) Inland Revenue National Insurance Contributions Office adopted an approach in her contributions to this case that suggested that she failed to appreciate that my jurisdiction as a Social Security Commissioner is the direct equivalent of the jurisdiction of a High Court Judge in a contributions appeal. But that does not of itself warrant an oral hearing. And I see no other issue that could be assisted by an oral hearing in this case. It depends purely on the documents and on the application of complicated but clear law to accepted facts. The substance of Mr D’s argument, in so far as I have jurisdiction to consider it, is with the terms of the law. That is a political issue. I therefore issued a draft of this decision to both parties and invited comments, in place of holding a hearing. I have received Mr D’s comments on the draft, but none from the Respondent.  I confirm - with some changes of detail but without an oral hearing  - the draft decision, and give full reasons below.    

Mr D’s pensions

3	Mr D reached state pensionable age on 23 October 2001. He claimed a state retirement pension.  He was also entitled to an occupational pension from the Civil Service and a private pension from the Equitable Life Assurance Society. He claims that he is being underpaid his state retirement pension.  When the appeal tribunal failed to agree with him he first asked for its decision to be set aside. When that was refused, he asked for permission to appeal. I granted permission because this case appeared to involve some of the complexities that lie behind the operation of our pensions laws and I considered that the claimant’s grounds of appeal raised issues deserving full consideration.

The state retirement pension

4	Mr D’s state retirement pension potentially consists of three linked pension entitlements: 
- a basic state pension, payable to everyone with an adequate contribution record at a flat weekly rate; 
- an additional pension - also known previously as the State Earnings Related Pension Scheme (“SERPS”) and now as the State Second Pension (“SSP” or “S2P”) - payable at a rate based entirely on contributions; and 
- a further additional pension from the Graduated Retirement Benefit Scheme that applied for a few years before 1978, when SERPS was introduced, also payable at a rate based entirely on contributions. 
Mr D does not dispute his basic retirement pension or any graduated retirement benefit. He does dispute his additional pension, entirely formed as a SERPS pension. For simplicity, my references to his state pension in this decision are to his additional pension or SERPS entitlement only. 

5	The calculation of Mr D’s SERPS (or additional) pension entitlement is in part by the National Insurance Contributions Office of Her Majesty’s Revenue and Customs (“HMRC”, formerly the Inland Revenue). It is also in part by the Pensions Service of DWP (Department for Work and Pensions). HMRC handled this case and not DWP. HMRC made the GMP calculations, and they are in the papers. What happened next is not for HMRC but DWP. That is not fully in the papers.  It is the responsibility of the Secretary of State for Work and Pensions, acting through the Pensions Service, to offset any GMP entitlement against any entitlement that a pensioner has to a SERPS pension. How this is done is laid down by law in the Social Security Contributions and Benefits Act 1992 and the Pension Schemes Act 1993. I considered it in detail in my decision R(P) 1/04. 

6	The way that the system works is fully laid down by law. It is simple in outline but, as appeals to Commissioners have shown, its detail often confuses pensioners. Officials in (currently) DWP work out what the pensioner’s full additional pension would be. To do so they assume that the pensioner is entitled to the maximum additional  (or SERPS) pension that his or her contributions could earn. If he or she has no contracted-out pensions, that is the SERPS or additional pension he or she will receive. 

7	That does not apply to most employees. On retirement, most employed claimants receive one or more occupational pensions from a contracted-out scheme. This includes Mr D. For them, the additional pension calculation is a notional calculation. It is not their pension entitlement from the state scheme. In their cases, officials in (now) HMRC work out the GMP for each occupational pension. This is notified to DWP Pension Service officials. DWP is required to deduct each GMP for any occupational pension from a pensioner’s notional total additional pension. The pensioner receives what is left after the deduction of the full value of all GMPs from the notional total additional pension. That is relatively straightforward in cases where an employee has been in contracted-out employment throughout his or her working life, as many have. But there are many others, like Mr D, who worked for parts of their working life in contracted-out employment and for other parts in non-contracted out employment. For them, the calculation of full state pension entitlement often appears complicated. And some, including Mr D, claim it is unfair. 

8	There are two elements of the calculation that may give pensioners a belief that they are entitled to more pension than their actual entitlement. The first is that the GMP for an occupational pension may be more than they actually receive from the occupational pension. (In other cases it may be less). The full GMP must be deducted even if the pensioner does not receive it all. The second is that the calculation is based on a notional total additional pension, although the pensioner is not entitled to the full amount. So it sometimes appears that someone is being given a pension and then has it taken away again. While that is true of the mathematics, it is not true of the law.     

9	The confusion is made worse because HMRC, DWP, and others use two or more names for the same elements in pensions. Besides “SERPS” also being the “additional pension”, “GMP” is also known as the “Contracted Out Deduction” or “COD”. Occupational pension schemes are usually based on the final earnings of an employee, and the Civil Service Scheme is such a scheme. It is, in official jargon, a “COSR” (contracted-out salary related scheme). In other jargon it is a “defined benefits scheme”. That is, entitlement is defined not by the contributions paid in but by a defined scale of benefits awarded to members of the fund. Those benefits are normally defined by relation to earnings (hence the “earnings-related” or SERPS label). These schemes are contrasted to defined contributions schemes or  “COMP” (contracted-out money purchase schemes). In a COMP/defined contributions scheme, pension entitlement is related not to earnings or to any defined level of benefit entitlement but purely to the level of the sums contributed, invested or purchased. Personal pensions are COMP schemes. So are many occupational schemes. No approved or contracted-out scheme can be both defined benefit and defined contribution. It must be one or the other. But there are in law important differences between a COSP and a COMP or between a defined benefit scheme and a defined contributions scheme. The most important is that there are normally guaranteed minimum pensions payable from COSP or defined benefit schemes, but not from COMP or defined contribution schemes. 

10	Mr D is entitled to a state pension and to his occupational pensions. He was in contracted-out employment for part of his working life. And there is an additional complication. Some of his occupational pension funds were moved from one pension provider to another before he retired. It is necessary in understanding Mr D’s position to look in some detail at each of his two occupational pensions. I deal first with Mr D’s civil service pension, and how this affects his state pension. I then deal with the private pension and its effect on his state pension.

The civil service pension

11	 Mr D was a member of the Civil Service Pension Scheme (“CSPS”) from February 1989 to August 1994.  That is a self-contained pension scheme and not one provided by the state through DWP. It is officially approved as a contracted-out salary related pension scheme. This means that it is contracted out, by agreement between the employer and the government authorities, from the state earnings-related pension scheme (SERPS). While Mr D was a member of the CSPS he paid lower Class 1 National Insurance contributions than he would otherwise have paid. This is because he was contributing to, and becoming entitled to, a CSPS pension instead of the SERPS pension that would have been received from paying the full Class 1 contributions at that time. The policy here is simple: a person cannot have the benefit of both reduced contributions to the state scheme and a full pension from it. An individual employee has no say in whether an occupational pension is or is not contracted out. Mr D objects that this is unfair. I cannot comment on that. It is a matter of law over which the government department and the judiciary have no discretion. 

12	Mr D gained two legal entitlements while a member of the CSPS. He became entitled to the level of pension provided by the scheme as a result of his contributions and membership (his defined benefits). He also became entitled, under the Pension Schemes Act 1993, to a guaranteed minimum pension (GMP) in respect of the CSPS scheme. The trustees of the CSPS were obliged to pay him not less than the weekly GMP provided by law. It is a “guaranteed minimum pension” because the trustees are required to pay not less than the guaranteed amount to Mr D. They may pay more, but they cannot pay less (if they have the funds to do it). The GMP to which Mr D was entitled was calculated as £23.48 a week. (This figure was uprated annually to the year of retirement in accordance with the standard procedure from the £17.99 to which he was found prospectively to be entitled when he left the Civil Service). There is a full, but inevitably complicated, explanation of that figure in the papers. Mr D has not challenged that calculation, and I see nothing wrong with it. I have no jurisdiction or power to consider the CSPS pension entitlement. 

13	In summary, Mr D was entitled to a guaranteed minimum pension from his CSPS pension of £23.48 at retirement. As this was a contracted-out pension, his state pension was reduced by £23.48 to stop him receiving the same pension twice. Mr D does not dispute that. 

The Equitable Life pension

14	The position with Mr D’s other pension is more complicated. Mr D worked for the Bank of America for some years. During that time, he was a member of the Bank’s UK Retirement and Benefits Plan, run for the Bank by Guardian Financial Services. This was a period starting before April 1978 (when the SERPS scheme started) to April 1984, and again from April 1985 to September 1985. His involvement in the Plan was in a deferred annuity contract. That is a scheme under which he and the employer paid in sums while Mr D worked that were later, with the associated tax-privileged investment income earned in the Plan on the accumulated contributions, used to buy a retirement annuity when he retired. Mr D’s pension entitlement under that Plan was protected, like that of the CSPS, because it had a GMP.

15	Mr D agreed to the transfer to the Equitable Personal Pension Plan of all the funds held by the Bank of America Fund. I know nothing of the circumstances that led to his decision. But his signed agreement is in the papers. That agreement contains a statement of the funds transferred, and also a statement, signed for the administrator of the Bank’s Plan, of the minimum cash value at retirement of the fund being transferred (that is, the cash value of the fund available to buy an annuity). The maximum cash certificate records that the capital sum available when Mr D transferred his funds from that Fund to the Equitable Life Personal Pension Policy was over £19,000. 

16	When Mr D retired, he purchased an annuity from the Standard Life Assurance Company. The gross annuity he received was £533 a year. This is £10.26 a week. This was because the sum paid in to the annuity from the Equitable Life Pension Administrators was a little over £10,000. This was significantly less than the sum would have been had the original £19,000 been uprated in the usual way from the time Mr D transferred it to the date he used it to buy an annuity. The reasons for that are a matter of public record and not part of this appeal. The details of Mr D’s personal arrangements are all in the papers. 

17	What was the GMP to which Mr D was entitled by reason of his Equitable Life policy? The answer in law, as HMRC correctly contend, is that it did not have a GMP. The Equitable Life policy was a COMP - a tax privileged contracted out money purchase scheme, or defined contribution scheme. It had no defined benefits. It therefore removed Mr D’s entitlement to SERPS or the additional pension for the relevant period. It offered him a pension depending only on the amount of money paid in. There is no salary guarantee or GMP behind the payment to or from Equitable Life. If the sum he agreed to transfer to the Equitable Life policy in 1995 had doubled between then and his retirement, he might have received twice as much as if it had remained in the previous fund. If, as happened, it halved in value, then his pension was half what he would otherwise receive. He was not given a guarantee to make up any deficit, as equally he would not have had to forfeit any added pension if the investment were profitable.

18	Mr D is not happy with this. He stresses that he D paid into a COSP or defined benefits scheme. In doing so he benefited, as did his employers, from reduced NI contributions and significant income tax reliefs. But he then transferred the funds into another scheme. When the money was transferred from the Bank’s COSP scheme to the Equitable Life COMP scheme, Mr D did not lose any of the benefits from the reduced contributions or tax relief. Those advantages, hidden in the sum transferred, were retained in the new pension fund. But the new fund did not have its own GMP or contracted-out deduction. The opposite was true. The new fund might allow the investor/pensioner to receive a substantially bigger pension than under the guaranteed schemes but without penalty. Or it might, as happened, provide a smaller fund. 

19	The legislative approach adopted by Parliament when funds are transferred in this way is that the state neither takes away any increase nor subsidises any shortfall. The law ensures that the COMP (ore private pension) fund is taken into account in calculating the state additional pension in place of the COSP (or occupational salary related) fund. It does this by carrying forward the GMP to which the investor/pensioner was entitled at the date of transfer to the COMP fund. But it is a notional GMP only, and not an actual guarantee. There are no defined benefits or guaranteed pensions from a money purchase or defined contributions scheme. The rules are in the Pension Schemes Act 1993. 

20	I am satisfied that this happened in this case. The form signed by Mr D under which his funds were transferred to Equitable Life also contains the transfer value for GMP purposes certified by the Bank’s Fund administrator. That is by law (Pension Schemes Act 1993, section 146) the sum to be used for calculating the GMP associated with the Equitable Life policy because of the underlying Bank Plan – the original pension with the employer. The calculation is in the papers, and I am satisfied that - so far as I have jurisdiction to comment - it is correct. It uprates the certified GMP sum in accordance with the required annual revaluations. It then calculates the weekly equivalent of that sum. This is £34.10. The revalued sum goes into the calculation of additional pension (or SERPS) as a GMP in the same way as the CSPS GMP. 

21	It follows that Mr D is entitled to an additional pension subject to the deduction of the contracted out deductions or guaranteed minimum pensions in respect of both his Civil Service Pension Scheme pension and his Equitable Life pension. The first of those is a reduction of £23.48 a week. The second is a reduction of £34.10 a week. 

22	Mr D argues that the Government should make up his loss from the Equitable Life pension. In law, because of the transfer to which he agreed, he has no loss. This is because there was no guarantee to his Equitable Life policy. Had he kept all his occupational pension funds in schemes that had guarantees, then he would have received a guaranteed pension. He may now regret the transfer, or consider that he was in some way treated or advised unfairly when he did agree. But that does not alter the legal requirements on the Secretary of State and HMRC when working out his state additional pension or SERPS. In his final submission in the appeal, Mr D asserted that there should be no conflation between the original “protected rights” policy maintained by Guardian Financial Service for the Bank and the Equitable Life policy.  That is a misunderstanding. It is not a matter of conflation. It is a matter of replacement. Mr D agreed to the transfer. Following that the original pension plan lapsed and the new one replaced it. But, for the reasons stated, the law requires the amount of the GMP of the original plan to be transferred to the new plan stripped of the guarantee. This reflects the transfer of the accumulated benefit of reduced contributions and taxes. 

23	I agree with the submissions of HMRC and the decision of the appeal tribunal.   
I do not need to receive a submission from the Secretary of State about how the DWP Pensions Service handled this claim. His claim and appeal have been looked at fully and fairly both by the two governments departments and the appeal tribunal. He has received his full state pension entitlement in the light of the private arrangements to which he agreed. Any complaint he has is with the policy behind the law (which is a matter for Parliament, but not for the departments, the tribunal or Commissioners) or what happened when he agreed to take out the Equitable Life policy (a decision that did not involve any government department). 

								David Williams
								Commissioner

								04 October 2005
[Signed on the original on the date shown]