The level of benefits the Scheme can pay depends on four factors which will vary between individual members. These are:
The following paragraphs give a general description of how pensions at retirement are worked out. For more specific information on the calculation of individual benefits, you can contact the Administration Office.
The Pension Calculation
Scheme benefits are made up of a number of elements. Part of the pension is guaranteed, and the remainder is paid in the form of bonuses.
The amount of pension is calculated by reference to the four factors above, but will always be a fixed rate pension amount, paid four weekly, quarterly or annually.
Benefits earned for contributions paid to the Scheme before 7 April 1975
Contributions were made on a ‘flat rate’ basis. Members paid fixed amounts of pension contributions, which were not related to their earnings. The level of contribution up to April 1975 was never more than 20p a week. The pension earned for membership between 1952 and 7 April 1975 would never be more than £2.00 per week.
Benefits earned for contributions after 6 April 1975
If you left service after 7 April 1975, pension payable at the Scheme’s Pensionable age is based on your pensionable earnings, contributing service and the accrual rate, all of which are explained further below.
Pensionable earnings are normally an average of the highest three consecutive full tax years’ earnings (revalued in line with inflation) out of the last thirteen years of Scheme service since 6 April 1975.
Contributing service, which is your total Scheme service after 6 April 1975, plus any service transferred into the Scheme from another pension scheme, and any additional service credit due following the 1992 and 1994 valuations of the Scheme. Any period of strike absence when Scheme contributions were not repaid does not count as contributing service and is not included in the pension calculation.
Accrual Rate, which is the rate at which the pension earned after 6 April 1975 built up. The accrual rate used in the benefit calculation depends on the date you left the Scheme, as shown below:
|Date of leaving the Scheme:
||Accrual rate is:
|7 April 1975 – 31 March 1990
|1 April 1990 – 29 February 1992
|From 1 March 1992
For example, if you:
left after 1 March 1992; had 17 years of Scheme membership; and based on the calculation explained above, had pensionable earnings of £20,000 then your pension entitlement would be calculated as follows:
£20,000 x 17 = a pension of £5,667 per year, or a
60 weekly pension of £108.98
Depending on the date they left and the reason for leaving, some members receive:
- a make-up to a minimum rate – generally, where a member took age or incapacity retirement or redundancy retirement over a certain age;
- a value for money addition, which ensures that the benefits due to members who left before normal pensionable age represented fair return for their contributions. At retirement, actual earned benefits, plus any increases added to the pension before it becomes due for payment, are compared with the level of the value for money pension. If the earned pension does not, in the opinion of the Trustees, provide value for money for the contributions paid, the higher of the two is payable;
- an award of additional contributing service, for members made redundant between 11 March 1981 and 29 March 1987, and who were aged between 50 and 59 at the date of redundancy.
Any additions that are due are automatically added to pensions and do not have to be claimed separately.
The pension calculation – Bonuses
The remaining part of the pension is paid in the form of bonuses, which arise from surpluses from past valuations. Bonuses are additional pension amounts which are paid with the Guaranteed Benefits. Bonuses awarded from previous valuations cannot be guaranteed and in some circumstances, explained more fully in the section Benefits on Retirement, they might reduce.
The Guarantee arrangements protect your benefits, ensuring that there is no reduction in total benefits in cash terms even during a prolonged valuation deficit period, when pensions stand still.
The Guarantee arrangements are explained in more detail in the section About Your Scheme.
Your MPS benefits are made up of different elements. These may include Guaranteed Benefits, a Guaranteed Minimum Pension, bonuses awarded after privatisation and a value for money element.
Guaranteed Benefits are the part of pension built up during service in the industry. Guaranteed Benefits receive full annual increases in line with any increase in the cost of living as measured by the Retail Prices Index (RPI). Any increase is normally applied by the Scheme in the autumn. In years where RPI is less than zero, as it was in 2009, for example, the Rules ensure that any fall in RPI will not result in a reduction in your total pension.
Guaranteed Minimum Pension
If you contributed to the MPS after 5 April 1978, the MPS undertook that, from State Pensionable Age, the Scheme would pay at least a minimum level of pension, called the Guaranteed Minimum Pension (GMP), which replaces a comparable benefit otherwise payable from the State.
Before April 2010, State Pensionable Age was 65 for men and 60 for women. From April 2010, State Pensionable Age for women will gradually increase so that by 2020, State Pensionable Age will have been equalised for men and women, at age 65.
The GMP is not an additional pension; it is a minimum level, calculated by the State. If you contributed to the MPS after 5 April 1978, the Scheme pension is compared against the GMP to ensure that it is no less than the GMP. If it is less, it would be increased to the same value as the GMP.
The GMP should not be confused with the Guaranteed pension element which forms part of the benefits payable by the MPS.
The Scheme pays all the increases on any MPS pension in payment before the GMP becomes payable. Once GMP becomes payable, the Scheme increases any GMP earned after 5 April 1988 by the increase in the cost of living up to 3% each year. The pension increase on the pre April 1988 GMP and any increase in excess of 3% on the post 1988 GMP will be added to your State pension by the Benefits Agency when your State pension increases. These increases are effective from 6 April each year.
Bonuses arise from surpluses from previous valuations. They are not generally increased in the autumn. The autumn RPI increase does not apply to bonuses, or to any Guaranteed Minimum Pension element.
Value for Money
In accordance with statutory requirements, from 6 April 1975 the MPS Rules incorporate a ‘value for money’ provision to ensure that the benefits due to members who left before normal retirement age represented fair return for their contributions. The value for money ‘test’ is carried out at normal retirement age. Your earned benefits, together with any increases due in deferment, are compared with the level of the value for money pension. The higher of the value for money pension, or the earned pension plus any increases added to the pension before it becomes due for payment, is payable. Where the value for money pension is higher, the Scheme Rules require that bonuses do not decrease when guaranteed pensions rise.
Pensions and inflation (or deflation)
The Rules provide for the Guaranteed Benefits to increase each year by the increase in the Retail Prices Index (RPI) measured over the period June to June.
In 2009, the change to the RPI was negative (-1.6%). The Rules of the Scheme state that pensions cannot be allowed to fall and the Guaranteed Pension will stand still even when the RPI falls.
The Rules also state that any increases in RPI in subsequent years must be offset against negative RPI in earlier years. This means that annual increases on Guaranteed Benefits can only begin again once future RPI increases are more than the previous falls, though the Trustees’ aim is always to try and increase pensions in line with any increase in the RPI by awarding bonuses (when funding permits) to top up the Guaranteed benefit entitlement.
Increases and bonuses
Bonuses added to pensions are not generally increased, though flat rate bonuses have been (and in the future will be when affordable) added to Guaranteed Benefits with the aim of keeping benefits increased in line with inflation.
Bonuses already awarded came from surpluses in the Scheme after 1994. Bonuses have been added to pensions in 1997, 2000 and 2006 when reviews showed that there were surpluses in the Scheme. Continuing payment of bonuses is not guaranteed; bonuses are likely to decrease if a review shows that there is a large deficit in the Scheme, although overall pension cannot be reduced in cash terms, as previously explained.
Payment of Pension
MPS pensions are normally payable every four weeks, that is two weeks in advance and two weeks in arrears. For small pensions, payment is made quarterly or annually. Pensions are usually paid into your UK bank or building society account by direct credit from the Scheme’s bank account. Payment by cheque or girocheque is no longer available.
If you are living abroad, payments can be made to your overseas account although there may be additional bank charges. The Scheme offers an option to pay pensions to those living overseas quarterly or annually in order to reduce these costs and exchange rate losses.
Changes in circumstances
In most cases, pensions are payable for life, unless they were paid on the understanding that payment would only continue while the recipient meets certain qualifying conditions – for example, where a pension is being paid for the duration of a child’s education, or where a Serious Ill Health pension was awarded. Since 1979, widow’s benefits have been payable for life, even after re-marriage. However, the Scheme will need to be informed about the re-marriage in order to make sure we are making payments, and addressing correspondence, correctly.
Some changes in circumstances will affect payment of pension. All of the changes listed below should be reported to the Scheme’s administrators, who will confirm whether they affect the benefits payable to you.
What changes should be reported?
- Deaths – including the death of a Scheme member, a dependant or a deferred member
- Changes of address
- Closure of a bank account, or a change of account number
- A move to a retirement home, or to a nursing home
- A return to fitness for work, where Serious Ill Health Benefits were awarded
- If a child leaves school, or reaches age 21 if before (if a child’s pension is in payment)
- A divorce
- A change of name
Failure to notify the Administration Office of a change could result in an overpayment of Scheme benefits. In all cases, the Trustees have a duty to recover overpayments of MPS benefit and will take whatever action they consider necessary to recover overpaid money.
Confirming continuing entitlement to benefits
Our administrators make regular checks with a specialist tracing agency to ensure that the Scheme is advised where the death of a pensioner might have gone unreported. If we receive a report of a death, and we are not contacted by the next of kin within a reasonable period, we will write to our pensioner’s address to confirm the position.
It is important, and in the interest of all members, that Scheme benefits are paid only to those who are entitled to receive them. The Trustees are responsible for looking after the assets of the Scheme for every member. The Trustees would be accountable to members if they did not take action to recover any overpaid benefit. If fraud is involved, the Trustees will pursue the return of any money received fraudulently and, if necessary, take legal action to recover it.
Pensions in payment are taxed under PAYE, although lump sums paid from the Scheme are generally free of tax. If you have another pension arrangement which has yet to come into payment, you may be asked how much of your Lifetime Allowance is taken up by MPS benefits before that pension can be paid without incurring very high tax charges. More information about the Lifetime Allowance is covered in the next section but if your pension is already in payment you can work out the value of your MPS benefits against the Lifetime Allowance by multiplying your annual pension by 25 and, if you left the MPS before 1 March 1992, adding any separate lump sum. If you retired after 5 April 2006, the Lifetime Allowance figure will have been quoted on your retirement statement.