The Society of Pension Professionals (SPP) has published a comprehensive paper on the issue of pre-1997 pension scheme indexation.
Defined Benefit (DB) pension scheme members who accrued pension benefits before April 1997 do not have a statutory right to inflation-linked increases on that part of their pension. Many scheme rules require such increases to be paid, but a significant minority do not.
Against this backdrop some pensioner action groups from schemes including Hewlett Packard, BP, American Express and others have campaigned for a law change that would require all pension schemes to provide inflation linked increases on pension entitlements accrued prior to 1997.
With the passage of the Pension Schemes Bill, which includes new flexibilities relating to the use of pension scheme surpluses, the issue is generating increasing interest and renewed lobbying.
As a result, the SPP has published a detailed paper, “Government Policy or Scheme Discretion?”, which examines the issues relating to pre-1997 indexation in DB pension schemes.
The paper considers the costs of protection, scheme member perspectives, trustee duties, considerations for employers and highlights some of the issues with a proposed across the board legislative change. It comments on various potential solutions too – including the possibility of discretionary payments.
In addition, the paper considers the issues being faced by the Pension Protection Fund (PPF) who are increasingly being pressured to consider pre-1997 indexation for the 172,000 members of the PPF with accrued pensionable service prior to 6 April 1997 who receive no indexation.
The paper concludes, “…the SPP believes that pre-1997 indexation (and wider discretionary practice) is a scheme specific issue that should remain subject to negotiation rather than being subject to new legislative requirements.”
Jon Forsyth, Chair of the SPP’s DB Committee who led the work on this paper, said;
“Many pensioners have experienced an erosion of value in their pensions as a result of not having inflationary protection on their pre-1997 pensions. However, imposing an obligation to pay pre-1997 increases retroactively and across the board via a legislative change would present substantial challenges and risk unintended negative consequences, not least for those schemes who are in deficit or have only a small surplus. It could also be considered unfair in the context of employers having borne the risks associated with their DB schemes and often having paid large sums in deficit contributions. There are also considerations around the potential impact on various other stakeholders including younger generations.
Our new paper explores this complex area from different perspectives and we hope it will be a useful resource for decision makers. Taking all of the relevant viewpoints and factors into consideration, the SPP believes that Trustees and sponsors continue to be best placed to assess affordability, risk, and fairness for their individual scheme circumstances, rather than having an overriding government solution imposed upon them.
In our view, policymakers should instead continue to focus on the adequacy of pension provision for future generations, and should also strongly consider legislative change to permit one-off lump sum discretionary payments to DB scheme members.”
