‘A fundamental point of fairness’: MPs call for action on discretionary increases

In a parliamentary debate last week, outspoken MP Alistair Carmichael said that “a fundamental point of fairness is at stake” as several major companies had stopped paying their retired members in line with inflation.

Carmichael, the Liberal Democrat MP for Orkney and Shetland, gave an impassioned speech to the House of Commons calling for companies including BP, Shell and others to reinstate discretionary inflation-linked pension increases for scheme members with benefits accrued prior to 1997.

Carmichael said: “It pains me to say it. What might have started with the oil and gas companies, is clearly going much wider...

“It is worth reminding the House that a fundamental point of fairness is at stake here. When one is past retirement age, one no longer has the choices one has when one is of working age.

“If someone in employment is unhappy with the money they get for the work they do, they can look around and find another job, or they may choose to retrain and do something else more profitable.

“Once someone is of retirement age, they no longer have that choice and flexibility, which is why it has long been established as a matter of public policy that the beneficiaries of pension schemes require protection. After all, this is simply deferred income, with our being paid later, after we have stopped working, for the service we have done.

“It is a fundamental aspect of that protection that it should take as its starting point the undertakings that were given.”

Discretionary increases

Former employees of BP, Shell, ExxonMobil, Hewlett Packard and others have been lobbying MPs for some time after these companies decided not to pay pensions in line with inflation. All were mentioned in the debate.

Statutory increases only apply to benefits accrued after April 1997. However, the government’s recent proposal to allow schemes greater access to surplus funds has led to a debate about who should benefit.

Carmichael argued that companies would have given their staff “vigorous encouragement” to join pension schemes, including telling staff the benefits of an income later in life that was protected against inflation.

He said: “The people who run those companies should understand that we are watching what they are doing, that they have an obligation to treat their former workers and their pensioners fairly and that, if they do not have it within themselves to do that, we in parliament and in government will make sure that they have to.”

Shell and BP have refused discretionary increases to pensioners since MPs last debated the issue in January this year, Carmichael added.

‘Raw deal’ on indexation

Meanwhile, Allan Dorans, MP for Ayr, Carrick and Cumnock, used the debate to raise concerns over Hewlett Packard, which affects more than 1,500 people living in his constituency of Ayr, Carrick and Cumnock.

He said that, since Hewlett Packard had taken over the pension scheme for workers at a factory in Ayr, there had only been three discretionary increases: 1% in 2004, 1% in 2008, and 3% in 2022.

Dorans said: “Hewlett Packard Enterprise, while presenting itself to its customers and investors as the most ethical company in the world, is taking advantage of the weakness in the UK pension legislation relating to pre-1997 service.

“That has resulted in a ‘raw deal’ average pension of £9,700, which, even when topped up with the maximum state pension, results in low income living as defined by the government. Regardless of its legality, this practice is heartless, immoral and unethical, and it is absolutely unacceptable from a major global corporation.

“If other, far less profitable companies can pay increases to their pensioners, surely Hewlett Packard can as well.”

MPs including Dorans and Sir Stephen Timms, chair of the Work and Pensions Select Committee, called for the Pensions Regulator (TPR) to investigate how many schemes were permitted by their own rules to grant discretionary increases and whether they had done so “in recent years”. This was one of the recommendations of the committee’s recent report into the defined benefit sector.

Dorans said: “As a matter of urgency, I strongly encourage the pensions minister, the government and the Pensions Regulator to complete the research, which I believe will make it undeniably clear that an ethical code of conduct is required to ensure collaboration between companies and trustees on developing policy and strategy for pre-1997 discretionary increases.”

This, he argued, should include a requirement to include the payment of discretionary increases in any plans about long-term funding strategies.

Sir Stephen also called for clarity over the Pensions Regulator’s Funding Code, which he said should provide guidance on the appropriate use of surpluses without forcing schemes into buyout – which can remove any prospect of future discretionary increases.

The minister responds

Paul Maynard, the pensions minister, responded to the debate by emphasising that existing legislation sets minimum standards for indexation but discretionary payments were “the concern of the scheme trustees”.

He added: “It is important to achieve a balance, providing members with some measure of protection against inflation while not increasing a scheme’s costs beyond what most schemes can generally afford. Trustees, whether of big firms or small ones, must have an eye to the future viability of their scheme.”

Further reading

MP criticises BP’s leadership for ‘dealing from the bottom of the deck’ on UK pensions (18 January 2024)

WPC recommends changes to governance, surplus rules (26 March 2024)

Use surplus to restore inflation protection, say trustees (24 April 2024)