In Depth: The battle for pre-1997 indexation

“How many more of the pensioners who are suffering from the lack of indexation will have passed away or be pushed into further financial hardship by the time the government makes a decision on this – if it ever intends to?”

Kirsty Blackman, an MP for the Scottish National Party, aimed this question at pensions minister Torsten Bell during a committee discussion of the Pension Schemes Bill last month.

Her comments relate to the issue of pre-1997 indexation, a source of serious and long-running debate in many corners of the pensions industry – and one that is seemingly coming to a crucial juncture.

According to the Deprived Pensioners Association, members of the Financial Assistance Scheme (FAS) aged 80 or older receive no indexation to their pensions as their benefits were accrued prior to 1997. Those aged between 40 and 60 typically receive partial indexation as they have accrued benefits after 1997, but this depends on age and length of service.

For years, campaigners such as Roger Sainsbury of the Deprived Pensioners Association have been lobbying policymakers to change the law to allow for indexation for older pensioners.

Sainsbury, alongside Terry Monk of the Pensions Action Group, appeared before MPs at the start of September to raise the indexation issue again as the committee stage of the Pension Schemes Bill began. Their comments set out the stark reality of the situation and how crucial it is for affected members that the issue is addressed.

“Time is absolutely not on our side at all. Our claimants are dying, on average, at the rate of 15 a week,”

Monk explained that more than 5,500 members of the FAS and Pension Protection Fund (PPF) affected by the lack of indexation have died since he last appeared before MPs to raise the issue in November 2023.

Sainsbury added that some FAS members needed the money “desperately”, as “a lot of people will be suffering real misery and hardship”.

“Time is absolutely not on our side at all… That is why we are pressing to get an amendment to this bill to give a more timely answer.”

Roger Sainsbury, Deprived Pensioners Association

“We have been told by the [Department for Work and Pensions] that the necessary amendment to the Pensions Act 2004 cannot be made by statutory instrument. There would have to be a new bill and a new act, and goodness knows how many years that might take or how many more thousands of people would have died. That is why we are pressing to get an amendment to this bill to give a more timely answer.”

Making use of the PPF’s reserves

Of the 81 written submissions sent to the Pension Schemes Bill committee, more than a quarter – 25 in total – concerned indexation, a subject that received fairly little attention during the wider policy discussions related to the bill.

The submissions ranged from unions and campaign groups to individual members of the FAS and PPF, many of whom reported significant impacts on their pensions after their employers became insolvent.

With the PPF now reporting a reserve of more than £14bn, campaigners argued that the lifeboat fund had never been in a better position to improve payments to pre-1997 pensioners.

Meanwhile, the PPF appears to have warmed to the idea of using some of its reserve fund in this way. The organisation’s own submission to the Pension Schemes Bill committee made this clear, stating: “Given the PPF’s financial strength, we think it’s the right time to consider the levels of indexation we pay our members.”

As Roger Sainsbury explained to MPs last month, the PPF has worked with the Deprived Pensioners Association to develop a potential method of paying back indexation in arrears. The method, known as “retrospective indexation plus arrears”, or RIPA, has an estimated cost of £5.5bn – less than half the current reserve.

Sainsbury added: “There are two classes of membership [of FAS]: those with indexation and those without. There is nothing in the bill making any provision for that. It is grossly unfair and it needs to be done away with, and it just happens that the RIPA option is the minimum way of getting rid of that deplorable two-tier membership.”

However, there is a snag. As it is a public body, the PPF’s reserve features on the government’s balance sheet – even though the money cannot be used for anything other than paying compensation to current and future PPF members. The same issue limits changes to the FAS, too.

Rebecca White, an actuarial consultant at XPS, said in a recent blog that while increasing pre-1997 PPF and FAS benefits “would directly support members who’ve already lost out once through employer insolvency”, the government has warned that the potential effect on the public finances also needed to be considered. This was “an argument that feels more political than principled”, White said.

MPs say no to indexation amendments

Ultimately, it was the public finances problem that scuppered an attempt to put pre-1997 indexation on a statutory footing through the Pension Schemes Bill.

Liberal Democrat MPs John Milne and Steve Darling tabled amendments to the Pension Schemes Bill at the start of the committee process that would have introduced indexation for pre-1997 service covered by the FAS and PPF, as well as reimbursing members for the lack of indexation in the intervening years.

They also sought to add an amendment that would have required trustees of DB schemes outside the PPF to have regard for pre-1997 pensioners when deciding what to do with any surplus.

The SNP’s Blackman argued strongly in favour of the FAS and PPF amendment, stating: “I do not understand how any member of this house, let alone the government, could argue against making this change to protect pensioners.

“It may have an impact on the government’s balance sheet, but it does not have an impact on the government’s income, outgoings and ability to spend today. The PPF money cannot be used for anything other than reducing the levy or paying pensions.”

However, pensions minister Torsten Bell insisted that the amendments “would not work”. While he has promised to continue to consider the issue, he did not present an alternative during the committee’s debates.

While Blackman, Darling and Milne all backed the amendments, the eight Labour MPs on the committee voted against, and so the amendment will not form part of the bill. Pensioners with rapidly eroding benefits will be forced to wait once again for any resolution.