The Association of Electricity Supply Pensioners has launched a campaign to protect the benefits of more than 100,000 members of the Electricity Supply Pension Scheme, amid fears that pension increases that do not match inflation could amount to significant losses.
Many pension schemes have a built-in cap on increases of 5 per cent, but the ability to award discretionary rises above that figure. This is especially important if inflation tops the 5 per cent cap in September, which is a key reference month for calculating increases due next April.
We recognise that there are many pension schemes in other industrial sectors whose members will be lucky to get 5 per cent next year, let alone anything above that. But the electricity companies in charge of the ESPS are highly profitable, with strong cash flows and a well-developed sense of corporate responsibility
AESP
Aon warned on May 4 that the decision to award discretionary increases above the 5 per cent cap could see scheme liabilities raised by as much as £8bn, but the AESP argued that failing to keep track of inflation would lead to a permanent reduction in an individual’s pension that would be compounded on an annual basis.
ESPS members already ‘struggling’
Specifically, the AESP warned that the ESPS is not fully inflation-linked and that the scheme rules would allow it to cap pension increases at 5 per cent. The ESPS is a legacy scheme with 26 participating groups and around £50bn in assets.
Inflation as measured by the retail price index — the measure used for ESPS calculations — is currently at 9.9 per cent. Though the base rate was raised to 1 per cent on May 5 in a bid to control the rise, the Bank of England warned that inflation measured by the consumer price index — generally lower than the RPI — could exceed 10 per cent in the fourth quarter of 2022.
The AESP highlighted that a below-inflation pension increase would come at a time when ESPS members, especially pensioners, “will be struggling through the peak of the worst cost of living crisis in 60 years”.
It argued, however, that paying a full RPI-related increase was “clearly intended” to be the default position in the scheme rules, even if caveats technically allow for the 5 per cent cap.
Employers will need to have “deeply compelling reasons” for any departure from that default position, and the AESP said it would encourage group trustees and pensioner members to challenge “any purported justification for a departure from the default position with respect to next year’s pension increases”.
A ‘twist’ in the rules?
It also highlighted a “further twist” in the scheme rules with respect to groups that have appointed an independent trustee, as the rules stipulate that the employer “cannot substitute a different figure for the full RPI increase” without that trustee’s consent.
The AESP therefore suggested that group trustees “will need to be making appropriate representations to both the employer and, in particular, the [independent trustee]”.
“They should, for this purpose, expect to receive and be able to consider full details of the case which the employer will have submitted to the [independent trustee], thus ensuring transparency of process for all concerned,” it continued.
Schemes to weigh up £8bn cost of discretionary increases
Defined benefit schemes in the UK will have to weigh up the significant costs of granting discretionary increases later this year, which could add up to £8bn in liabilities across private sector DB schemes, according to Aon.
“We recognise that there are many pension schemes in other industrial sectors whose members will be lucky to get 5 per cent next year, let alone anything above that. But the electricity companies in charge of the ESPS are highly profitable, with strong cash flows and a well-developed sense of corporate responsibility.
“We believe that they will want to do the right thing for their pensioner members, and that the trustees of the scheme and the pensioners themselves will be expecting them to do so.”
