Invensys extends Pie to pensioners

Pies offer members the option to receive an initially higher pension income that either increases at a lower rate than their existing pension or does not increase at all. 

Schemes offering a Pie typically do so as a way to reduce the cost of running the scheme or the liability risk. Last month automotive and aerospace company GKN made a £7m saving following completion of a Pie.

The Invensys scheme began offering a Pie to members at the point of retirement on January 1 this year as part of a suite of derisking exercises.

It announced in a summer update to members that the option would soon be extended to other scheme members. 

In the newsletter, Kathleen O’Donovan, chairman of the trustees for the Invensys scheme, said: “At the start of this year we introduced this [Pie] option for members at retirement and the company has now decided to offer it to members who are already receiving a pension from us."

At the start of this year we introduced this [Pie] option for members at retirement and the company has now decided to offer it to members who are already receiving a pension from us

Kathleen O'Donovan

She added: “The offer is on similar terms to the at-retirement offer, which means the present value of the increases you can give up is calculated, and 80 per cent of this value is used to increase your current pension.”

The company will pay for members to receive independent financial advice to inform their decision.

Bob Scott, partner at consultancy LCP, said it was common practice for schemes looking to reduce costs to offer a percentage of the value of increases in a Pie.

“If you can offer something that is only worth 80 per cent it might still be attractive to the member because they can still use the money,” he said.

Scott added Pies could be especially attractive where members were concerned about the employer’s financial strength.

“If they were concerned about the status of the employer backing the scheme, then having a higher pension now may well be attractive to them as they get their value out earlier.

“It might also be useful if the scheme went insolvent and entered the [Pension Protection Fund] as the compensation is based on the pension you’re already receiving.”

Pies are typically offered to members at retirement rather than those who are already receiving a retirement income.

Mike Smedley, partner at consultancy KPMG, said: “[Pies] started really with people who had already retired and then extending them to people at the point of retirement came second.”

Best practice

He added that offerings to members in retirement carried more stringent guidelines from the industry code of practice on incentive exercises, although following the code is voluntary.

“Pie at retirement was seen as carrying less risk,” he said. “There’s a higher bar set for pensions in payment already.”

Lynda Whitney, partner at consultancy Aon Hewitt, said schemes offering Pies to retired members should consult the code, ensuring they follow its guidelines on dealing with vulnerable members.

The code of practice states such incentive exercises should only be offered to vulnerable members, including those over the age of 80, on an opt-in basis.

“It lays out guidance for protecting pensioners,” she said. “You wouldn’t send them any numbers up front… Members need to understand the risk they’re taking.”