Public service pension increases

Statutory requirement to increase public service pensions

There is a statutory requirement to increase the main public service pensions in payment each April in line with prices. The requirement is for the increase to be at the same rate as the additional State Pension, now measured according to the annual increase in the Consumer Prices Index (CPI) in the year to the preceding September.

Further information is available in the Library briefing on State Pension uprating.

Switch to CPI

Until April 2011, the measure of prices used was the Retail Prices Index (RPI). However, in the June 2010 Budget, the Coalition Government announced that it was switching to the Consumer Prices Index (CPI). The change to using CPI aimed to use “a better representation of the way consumers change their consumption patterns in response to price changes.”

CPI generally increases less quickly than RPI, which meant that the change to using CPI was expected to reduce the generosity of public service pensions and the cost of providing them. The change was unsuccessfully challenged in the courts by public service trade unions. The Government estimated in July 2021 that the switch to CPI, along with increases in member contributions and structural reforms in 2014 and 2015, will save over £400 billion across the 50 years following their introduction (PDF).

RPI is still used by many defined benefit pension schemes in the private sector. In September 2019, the UK Statistics Authority said it intended to address shortcomings of the RPI by bringing the methodology for calculating it into line with that for CPIH (Consumer Price Inflation including owner occupier housing costs). Following consultation, HM Treasury announced in November 2020 that this would not happen before 2030.

Further information is available in the Library briefing Occupational pension increases.

Guaranteed Minimum Pension (GMP) increases

The basic and additional state pension

For people who reached State Pension age before 6 April 2016, the State Pension has two tiers:

• The basic State Pension – which is a contributory flat-rate benefit.
• The additional State Pension – which depends on someone’s earnings during their working life since 1978.

When the additional State Pension was introduced, it was possible to contract-out of it. This meant that both the employer and employee paid a reduced rate of National Insurance and instead of the additional State Pension the employee received a workplace pension meeting certain requirements.

Contracting-out ended when the new single-tier State Pension replaced the basic and additional State Pensions in April 2016 as there was no longer an additional State Pension to contract-out from.

Guaranteed Minimum Pensions (GMP)

A Guaranteed Minimum Pension (GMP) is a minimum pension normally provided through a workplace pension scheme to people who contracted-out of the additional State Pension between 6 April 1978 and 5 April 1997.

Until April 2016, when the State Pension changed and contracting out ended, the main public service pension schemes were contracted-out of the additional State Pension.

Special arrangements for public service pensions

For public service pensions, there were special arrangements to ensure that public servants received increases (indexation) on their GMP, while preventing double increases.

With the introduction of the new State Pension in April 2016, the additional State Pension (which formed part of these arrangements) was removed. While it looked for a permanent solution, in November 2016 the Government put in place temporary arrangements, committing to full indexation of GMPs earned in public service for people who reach State Pension before April 2021. In March 2021, the Government said in a statement that it would make full indexation the permanent solution.