Sonya Fraser of the Society of Pension Professionals outlines the proposed changes to PPF benefits accrued prior to April 1997, and the wider ramifications of the government’s decision to allow inflation-linked increases from next year.
The indexation of payments from defined benefit (DB) pension schemes is attracting increasing attention as the Pension Schemes Bill makes its journey through parliament, and following the government’s announcement in the Budget that certain pre-1997 pensions in the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS) will benefit from capped inflation-linked increases from January 2027.
There is no statutory requirement for DB schemes to provide indexation on pensions accrued before 6 April 1997, except in relation to post-1988 guaranteed minimum pensions (GMP). This contrasts with post-1997 service, where statutory minimum increases apply, capped at 5% a year until 5 April 2005 and then 2.5% a year for service after that date.
As a result, the treatment of (non-GMP) pre-1997 benefits depends entirely on scheme-specific rules. Some schemes provide discretionary or guaranteed increases on pre-1997 benefits, while others pay pensions in respect of that service on a strictly level basis.
Why the issue is attracting attention
High inflation in recent years has eroded the value of some pensions, with the impact felt most acutely by long-retired members whose benefits are largely made up of non-increasing pre-1997 pensions.
Meanwhile, many DB schemes have entered into surplus in recent years, leading to discussions (and new legislation) around how that surplus can and should be used.
This has prompted renewed debate around fairness between cohorts of pensioners and whether historical design decisions remain appropriate in a very different economic environment. The issue of pre-1997 indexation has been described by campaigners and pensioner groups as a matter of social justice.
However, many in the industry would caution the government against imposing a retroactive statutory obligation for all DB schemes to provide increases on pre-1997 pensions. The matter is fraught with complex issues, as explored in some depth in the SPP’s recent paper.
SPP warns against blanket law change on pre-1997 indexation
In November, the SPP urged the government not to impose a universal requirement for DB schemes to grant inflation increases on pre-1997 pensions, arguing the issue was too complex and varied to be solved through legislation. Read the full article.
Trustee considerations and scheme impact
For trustees, the issue of discretionary increases is rarely straightforward. Many DB schemes have only recently moved into surplus following years of deficit management, and those surpluses may be fragile or contingent on market conditions. Introducing or enhancing pre-1997 increases can materially alter a scheme’s funding position and long-term risk profile.
Trustees must also consider their fiduciary duties, including the need to act in accordance with scheme rules and to appropriately balance the interests of different classes of beneficiaries, while maintaining the security of promised benefits.
Furthermore, many schemes are actively pursuing endgame strategies such as buyout, consolidation, or run-off. Any change to benefit design, particularly one that increases liabilities, can affect pricing and transaction timing.
From a practical perspective, trustees also need to consider administration complexity, data quality and the operational challenges of implementing discretionary increases.
Employer and covenant perspectives
From an employer standpoint, mandating pre-1997 increases would represent a retroactive increase in benefit costs for service accrued under a different legal and economic framework.
Many employers would argue that contributions paid historically were made on the basis that pre-1997 benefits were not inflation-linked, and that altering this retrospectively undermines legal certainty and long-term business planning.
Further, not all pension schemes are in surplus and not all employer covenants are strong – at the extreme, increased scheme costs could lead to some sponsor insolvencies and the scheme ending up in the PPF.
Mandating pre-1997 increases would reignite concerns about regulatory stability in the DB landscape. There are also intergenerational issues at play, given that directing additional resources to legacy DB benefits could divert attention and funding away from addressing the adequacy challenges faced by current and future defined contribution savers.
Helpfully, the government has announced that legislation will be introduced to enable one-off payments to be made to members over the normal minimum pension age. While there will still be intergenerational issues to consider, this will at least provide schemes with more options.
Ultimately, as the recent SPP paper concludes, pre‑1997 indexation is a nuanced and complex issue with no one‑size‑fits‑all solution. Although the moral and political arguments for protecting older pensioners from inflation are understandable, a blanket statutory requirement could have unintended consequences.
Instead, scheme-specific discretion, exercised within a robust governance framework, arguably remains the most appropriate way to address pre‑1997 indexation, balancing fairness, affordability and long‑term sustainability.
Sonya Fraser is a member of the Society of Pension Professionals’ defined benefit committee.
