The vast majority of Defined Benefit (DB) pension schemes will be offering below-inflation increases to their members according to Broadstone, a leading independent pensions, employee benefits, investments and insurance consultancy.
The analysis of data from the Pension Protection Fund’s (PPF) Purple Book1 finds that 9% of schemes provide uncapped inflationary indexation increases to benefits accrued before 5 April 1997. An identical proportion of schemes are similarly providing uncapped inflation increases for post-1997 benefits.
More than two-thirds (68%) of schemes provided inflation increases either via CPI or RPI that, for the vast majority, are typically capped at 5% for post-1997 benefits.
For benefits accrued before 1997, 31% of schemes have capped inflationary increases and a similar proportion (32%) have fixed increases. One in five schemes (21%) do not have any indexation on these scheme benefits.
While the State Pension ratchet is similarly taken from September’s CPI print ahead of an April uprating, the triple lock is uncapped and also takes the earnings figure into consideration hence this year’s increase of 8.5% - a second successive significant lift.
David Brooks, Head of Policy at Broadstone, commented: “Soaring inflation has once more brought the topic of Defined Benefit indexation back into the spotlight.
“It is clear that the majority of schemes will be uprating member benefits below the September rate of inflation given the prevalence of 5% caps. It is important that members are aware of how their benefits will be impacted in April so they can budget accordingly and don’t receive any nasty surprises.
“What makes this issue more complicated for schemes and trustees is that the cost of living crisis has coincided with significant funding improvements for DB schemes leading to calls for discretionary increases for member benefits.
“Members believe that due to the improvement in funding levels, pension schemes could reasonably afford to grant a one-off uprating to help payments keep pace with inflation at a difficult time for household budgets.
“However, members need to appreciate that ‘heads I win, tails you lose’ has put large strains on employers to invest in these pension schemes over many years – more than they probably ever anticipated.
“Providing greater than agreed increases is not something that employers should be compelled to do although we understand the pensions minister is mulling on this area. Other than introducing some upside sharing for the distribution of a funding surplus from the recent consultation, it is unlikely there will be a legal way to help members.”
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