Forcing retirement schemes to boost payments for pensioners whose pots have been hit by inflation would risk creating “unintended negative consequences” that could push some sponsors into insolvency, the pensions industry trade body has warned.
The Society of Pension Professionals said that imposing obligations on schemes through legislation would create big costs and be considered unfair by many companies that sponsor pensions.
It could also tip some employers into financial difficulties, raising the risk that they collapse and their schemes fall into the Pension Protection Fund, the industry lifeboat, the trade body added.
The society’s warning is likely to intensify debate around so-called “pre-1997 indexation”, an issue that has risen up the agenda this year as the government’s new Pension Schemes Bill moves through parliament.
While defined benefit (DB) pensions accrued in respect of service after April 1997 are shielded from the impact of inflation, service before then is not.
This means many pensioners in their eighties and nineties have suffered big real-terms cuts to their incomes because of the recent surge in inflation. Some are calling for the bill to be changed to force their former employers to uprate their pensions.
Currently, while many DB schemes have lifted pension payments for pre-1997 service, these increases have been at the discretion of the scheme trustees or sponsor. Employers that have come under fire from their former workers for their treatment of pre-1997 pensions include American Express, Hewlett Packard and BP.
The bill has fuelled lobbying over the issue because it will give employers much greater flexibility to access surpluses that may have built up in their DB schemes, although no obligation to use these surpluses to tackle the pre-1997 indexation issue has been proposed.
In a report, the society conceded that “the disparity in value can be stark, with pensions that increase in line with inflation, even capped, being worth 30 per cent or more versus those that do not”.
Yet it cautioned that “requiring all DB schemes to provide for pre-1997 increases would result in many schemes and sponsors bearing additional funding burdens, especially difficult for those already in deficit. At an extreme, it could even perhaps lead to some sponsor insolvencies with schemes being forced into the PPF.”
Only forcing schemes that are in surplus to lift pre-1997 pensions will not solve the problem, either, the society argued, because there would be debate over how to measure surpluses and a scheme could later fall into deficit, causing further complications.
The timebomb the UK faces over the adequacy of less-generous defined contribution (DC) pensions, which have supplanted DB schemes in recent years, is another consideration. The society said: “Some might question whether going back to further protect historical benefits for DB members — potentially at the expense of funds being used to enhance DC contributions for current and future employees — is fair.”
Jon Forsyth, the chair of the society’s DB committee, added: “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.
“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.”
The society concluded that pre-1997 indexation “is a scheme specific issue that should remain subject to negotiation” rather than legislation.