The Department for Work and Pensions (DWP) is set to engage with the regulator over how defined benefit (DB) pension schemes treat members with benefits accrued prior to April 1997.
This week, the Work and Pensions Committee published the government’s response to the committee’s enquiry into DB pension schemes. Among the committee’s recommendations was that the Pensions Regulator (TPR) investigate how schemes have handled pre-1997 increases.
DB pensions accrued after April 1997 are linked to inflation by law, but benefits accrued before this are not. Instead, it is often left to the discretion of the trustees and employer whether these benefits are increased and by how much, dependent on the individual scheme’s rules.
“Pension scheme trustees and sponsoring employers need to think carefully about the impact inflation has on members’ benefits when they are making decisions about benefit increases.”
Government response
In its response to the committee, the government said it took the issue “very seriously” and recognised that affected members were “understandably concerned at seeing inflation erode the value of their retirement income”.
“Pension scheme trustees and sponsoring employers need to think carefully about the impact inflation has on members’ benefits when they are making decisions about benefit increases,” the government said.
It explained that the DWP “plans to work with TPR to understand the reasons why schemes are not making discretionary pre-1997 payments and monitor trends”.
TPR data shows that two thirds (67%) of DB schemes were permitted by their rules to provide discretionary benefit increases. Of these, a third (32%) had provided a discretionary increase in the past three years. However, just 15% of these discretionary increases were for pre-1997 benefits.
Trustees are already required to consider “the situation of those members who would benefit from a discretionary increase and whether the scheme has a history of making such awards”, the government pointed out.
Planned changes to surplus release rules would also include a requirement for trustees to consider how members could benefit from surpluses, including through discretionary increases.
The case for discretionary increases is becoming compelling
In this expert comment from April 2024, Osborne Clarke’s Claire Rankin explains the different forces at play when trustees and employers consider discretionary pension increases. Read more
Pensioner campaigns bear fruit
Campaign groups have been lobbying MPs for years over discretionary benefit increases. During the Work and Pensions Committee’s hearings, MPs heard from former employees of BP, Shell, ExxonMobil, Hewlett Packard and others about how they had been affected after the firms had opted not to increase pensions in line with inflation.
In May last year, Liberal Democrat MP Alistair Carmichael raised the subject in parliament, calling it “a fundamental point of fairness” and urging action by employers.
He added: “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.”
The Association of Member Nominated Trustees has previously argued for surplus assets to be used to restore inflation protection. It said many older members had experienced a “significant fall in their pensions in real value for the rest of their lifetime”, and argued that strong funding positions should be used to address this issue.
