Under the rule change, the trustees of the scheme would be allowed to reduce inflation protection from the Retail Prices Index to the generally lower Consumer Prices Index. But a second aspect of the rule change would result in some pensioners having their pension (and any pension for their widow) completely frozen or largely frozen. This is because the legal requirement to index all of a pension in payment only applies in respect of years of service since 1997 – for service before that date, there is only a very restricted legal requirement to uprate the pension and only then for a limited period. This means that an older pensioner who did all of their service before 1997, and particularly before 1988, could have their pension frozen. More generally, older pensioners who did most of their work before 1997 will see a large part of their pension frozen with only a very small annual increase.
This possibility is specifically mentioned in paragraph 85 of the consultation document which says that “If adopted, this [rule change] would mean that in the future existing pensioners would receive lower increases to their pensions than they would under the current scheme rules, or possibly no increases at all,” [italics ours].
The independent Office for Budget Responsibility has estimated that in the long-run the RPI will generally be about 1.4% above the CPI. Assuming that CPI reverts to its Bank of England target of 2%, this suggests a long-run RPI level of 3.4%. An 80 year-old pensioner on £100 per week who did all of their service before 1997 could see their pension frozen at £100 for the rest of their retirement, rather than see it rise to £103.40 after one year, £106.92 in year two and so on. Adding up all of these differences over a ten year period means that this pensioner would lose over £10,000 in total, excluding the ongoing freeze of any pension payable to a surviving spouse. Widows, who make up around one third of the ‘pensioner’ members of the British Steel Pension Scheme, could be particularly affected.
Commenting, Steve Webb, Director of Policy at Royal London, said: “The rules around pension uprating are complex, and the Government’s consultation document is far from clear about how this change will disproportionately affect older and more vulnerable pensioners. This is not simply a case of switching from one inflation measure to another. Many thousands of older steel workers and their widows could see their pensions largely frozen for the rest of their life if these plans go ahead, with losses running into thousands of pounds. This is a big issue for the steel workers scheme, but an even bigger issue if the principle is applied to a wider group of salary-related pension schemes. This potentially huge impact, buried in the small print of the government’s consultation document, highlights the way in which rushed legislation can all too often have unintended consequences. The Government and the pension scheme need to make sure that older workers know what is happening and feed in to the consultation process.”
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