This paper looks at the new financial terms for contracting-out which will operate during the 5 years commencing 6 April 1983. In the remainder of this section we briefly review the background to the terms which operated during the first 5 years of contracting-out, while in §§2–6 we consider the individual elements of the new terms. In § 7, we describe how projection techniques can be used to determine whether the new terms may be favourable for a particular group of employees.

The framework of the current earnings-related State pension scheme was first proposed in September 1974 in the White Paper ‘Better Pensions’. The White Paper emphasized the need for an earnings-related component to build on the basic flat-rate pension, together with the need for full inflation-proofing of State pensions.

In recognition of the large proportion of the population that was already covered by ‘final salary’ occupational schemes it was proposed that the new State scheme should operate in partnership with such schemes. Thus occupational schemes of a sufficient standard would be permitted to ‘contract-out’ and accept responsibility for paying the guaranteed minimum pension (or GMP, broadly equivalent to the earnings-related State pension), the members and their employers in return paying reduced rates of National Insurance (NI) contribution.