More than a quarter of a million people in the UK could soon see their pension payments increase, following a significant announcement from the Department for Work and Pensions.
Historic Pension Rule Change Explained
The update centres on a long-standing and complex issue affecting members of defined benefit pension schemes. These schemes promise a specific retirement income based on salary and years of service. However, an obscure rule change from 1997 has created a disparity for decades.
Before April 1997, there was no legal requirement for pension schemes to increase payments in line with inflation. This meant that for pension benefits accrued before that date, the value could be eroded over time. While some schemes offered discretionary increases, many did not, leaving savers at a disadvantage compared to those with post-1997 benefits, which are statutorily inflation-linked.
Who Will Benefit from the New Plans?
In a recent address to MPs, Pensions Minister Torsten Bell provided crucial details on who stands to gain. The government's plan, announced at the Budget, focuses on individuals whose original pension schemes either collapsed into insolvency or where the sponsoring employer no longer operates.
These savers are now protected by either the Pension Protection Fund (PPF) or the Financial Assistance Scheme (FAS). The new policy will introduce pre-1997 indexation for members of these safety-net schemes, but only where their original pension plan provided for it.
Minister Bell confirmed the scale of the impact: "The PPF have made an assessment that around 165,000 PPF members and 91,000 current FAS members will benefit from this change." This combined total of 256,000 represents a substantial group of pensioners who will see their future compensation payments rise in line with the Consumer Prices Index (CPI), capped at 2.5% annually.
The Wider Picture on Pre-1997 Increases
The issue extends beyond those in the PPF and FAS. Responding to a separate parliamentary question, Mr Bell revealed that around 17% of members of private sector defined benefit schemes still receive no inflation increases on pre-1997 benefits.
To address this, the government is pursuing broader reforms through the Pension Schemes Bill. These changes aim to allow trustees of well-funded pension schemes to share surplus funds with employers, on the condition that member benefits are protected and enhanced.
"As part of any agreement to release surplus funds to the employer, trustees will be better placed to negotiate additional benefits for members such as discretionary indexation," Bell explained. This move could unlock an estimated £160 billion in surplus funds, potentially boosting both member benefits and wider economic investment.
The Pensions Regulator is set to issue further guidance on surplus sharing once the relevant legislation is passed. For now, the clear and immediate good news is that a major step has been taken to rectify a historic inequality for 256,000 pensioners.
