CPI-linked increases for members of the Pension Protection Fund (PPF) and the Financial Assistance Scheme (FAS) will be introduced for pre-1997 accruals, the chancellor has announced.
Delivering her second Budget speech as chancellor this week, Rachel Reeves confirmed the change would be implemented from January 2027 with a 2.5% cap.
“I will index the inflation on pensions accrued before 1997 in the [PPF] and the [FAS] so that people whose pension schemes became insolvent, through no fault of their own, no longer lose out as a result of inflation,” she said.
The details are still to be confirmed, but the Budget document stated that the CPI-linked increases would be capped at 2.5% a year, and would also be limited to members of schemes “where their original schemes provided this benefit”.
Sackers associate director Alex Anslow highlighted that this latter detail “raises the question about whether historical records will be in place to allow this to happen in all relevant cases”.
Pre-1997 indexation has been a long-running source of debate, with many of these schemes’ members living off benefits that have failed to keep up with inflation.
‘Right time’ to introduce indexation, says PPF
The Deprived Pensions Association (DPA) had been lobbying for this change, telling MPs last month that 5,000 PPF members had died since November 2023 without receiving indexed pensions. Though now successful, the DPA’s reaction to the news was sombre.
Terry Monk, a leading campaigner with the DPA, told Pensions Expert: “We have been campaigning for over 20 years, and the Pension Action Group campaign brought about the FAS, the forerunner of the PPF. Many FAS members have died while this struggle continued, and our thoughts are with the members and spouses [who] have died waiting for this decision.”
Michelle Ostermann, chief executive officer of the PPF, said: “This is the right time to make this change to enhance the inflation protection for our members. Twenty years on from the creation of the PPF, we’ve matured and now stand in a strong financial position.
“While risks do remain, we’re confident we can absorb this change without compromising the high security we provide for members’ benefits or impacting our plans to set a zero PPF levy next year.”
Indexation a ‘welcome move’
The chancellor’s announcement has been welcomed, with commentators arguing this will help protect members in the PPF and FAS from their pensions being further eroded by inflation.
“This is a welcome move with the PPF now reporting substantial reserves and growing headroom, which creates an affordable path to restoring the benefits to these pensioners,” said David Brooks, head of policy at Broadstone.
However, he added that further details are required to understand this policy change and just how many schemes will be included.
“Since the PPF’s launch in 2005, pensions accrued prior to 1997 have received no increases,” said Ian Mills, partner at Barnett Waddingham. “Over the intervening period, inflation has been persistent and occasionally very high, and so these people’s pensions have fallen significantly in real terms – while the PPF’s financial position has improved to the extent that it has been able to cut levies to zero.
“It seems fair and reasonable that these pensions are now provided with inflationary increases, putting more money in the pocket of some pensioners as they navigate the cost of living crisis.”
The Society of Pension Professionals (SPP) has calculated that the change will impact more than 250,000 members. In a report earlier this month, the society warned against “blanket” changes to the law, but has welcomed the flexibility in the government’s announcement this week.
Jon Forsyth, chair of the SPP’s DB committee, said: “As we made clear in our recent paper, individual schemes should be able to make decisions about whether or not to apply pre-1997 indexation and by making this legislative change, the PPF and FAS will now have such freedom.”
Boost for pre-97 pensioners outside PPF?
Phil Wadsworth, chief actuary at Aptia, said the development was good news and could give a further incentive for lobbyists working on behalf of other large occupational schemes to push for the same treatment.
“This is a complex subject, and in almost all cases, trustees will be cautious about [indexing pre-1997 benefits], often because they don’t want to set a precedent or a potentially confusing expectation for members,” said Wadsworth.
“Equally, sponsors as well as the government were looking to spend these monies in ways to drive their businesses and the economy.
“But trustees should prepare for further enquiries by making sure they understand their scheme’s position and communicating empathetically with members.”
“Not only will this impact the PPF’s available reserve, but it could also affect the wider ongoing debate on whether increases on pre-1997 pensions should be provided by defined benefit schemes more generally.”
Jeremy Goodwin, Eversheds Sutherland
Jeremy Goodwin, partner and head of pensions at Eversheds Sutherland, voiced concern that the announcement had been made without an industry consultation.
“Not only will this impact the PPF’s available reserve, but it could also affect the wider ongoing debate on whether increases on pre-1997 pensions should be provided by defined benefit schemes more generally,” he added. “This is currently a matter for negotiation between trustees and employers, but some MPs are calling for this to be mandated in the current Pension Schemes Bill.
“Negotiations between trustees and sponsors of well-funded DB schemes over the use of surplus may also be impacted by the announcement that the government intends to change the tax rules to enable these schemes to pay surplus funds directly to scheme members who are over age 55, where scheme rules and trustees permit, from April 2027.”
