Torsten Bell addressing MPs in the Commons (Image: undefined)
A significant update from the Department for Work and Pensions (DWP) suggests that over a quarter of a million people could soon receive increased pension payments. A minister has provided MPs with details that are expected to impact 256,000 savers.
This is all tied to a rule within the dry and little understood world of pensions that has affected many people for decades. Essentially, it involves large numbers of people in defined benefit pension schemes who have missed out on money compared to others.
These schemes promise members a specific level of payment based on length of service and salary at the time of retirement. However, obscure rules dating back more than 28 years have resulted in many scheme members receiving less than they could have done.
In 1997, the rules were amended to ensure that payments to members of such schemes increased annually with inflation. Prior to this change, some did not, resulting in some savers seeing inflation erode their funds.
The DWP has now shared new information on this issue with MPs. The government plans to make changes that will result in many tens of thousands of people receiving higher payments once the law is changed, reports the Mirror.
DWP Minister Torsten Bell addressed Members of Parliament to outline what is being planned. Since April 1997, there has been a statutory requirement for pension payments linked to such schemes to increase each year in line with inflation.
However, for amounts accumulated before that date, no such protection exists – and some individuals have witnessed their payments remain static whilst inflation has diminished the purchasing power of their money. Simultaneously, other savers were enrolled in pre-1997 schemes where so-called discretionary increases could be awarded annually – but these were dependent on individual arrangements and some provided no uplift whatsoever.
How many UK savers could receive additional funds through pension reforms
Labour MP Mr Bell – a former chief executive of the Resolution Foundation think tank and author – faced questioning on this matter from Neil Duncan-Jordan, Labour MP for Poole. Mr Duncan-Jordan enquired “how many pension scheme members affected by the absence of pre-1997 indexation will receive indexation [that is, payments linked to inflation]; and how many affected members will not receive indexation because they are in schemes that remain in operation.”
Essentially, he sought to establish how many individuals in such arrangements could gain from proposed Labour modifications – and how many might miss out.
Those who could gain is relatively straightforward to determine. The administration is planning to assist people where either their arrangement collapsed into bankruptcy or the company no longer exists.
The Pension Protection Fund (PPF) safeguards members of bankrupt schemes whilst the Financial Assistance Scheme (FAS) shields members where the original employer ceased trading long ago. Mr Bell announced that the recent Budget changes could result in higher payments for tens of thousands of individuals.
In response to a query, he stated: “At the Budget, the Chancellor announced that the Government will introduce pre-1997 indexation in the Pension Protection Fund (PPF) and the Financial Assistance Scheme (FAS), for members whose original schemes provided this. Compensation payments from these schemes on pensions built up before 6 April 1997 will be CPI-linked (capped at 2.5%), and this will apply prospectively [ie – going forwards].”
He further explained: “The PPF have made an assessment that around 165,000 PPF members and 91,000 current FAS members will benefit from this change as they have some pre-97 benefits where their former schemes provided mandatory indexation.”
Adding the 165,000 PPF members and 91,000 FAS members together results in a total of 256,000 beneficiaries. Individuals can only belong to one of the two schemes, so there is no overlap in these figures.
However, those who stand to gain from this change are savers who were part of inflation-linked schemes prior to becoming PPF or FAS members.
How many people are currently receiving no increase at all
The Parliamentary Secretary for the Treasury and Parliamentary Under-Secretary of State for Pensions was also questioned on the matter by Joshua Reynolds, Liberal Democrat MP for Maidenhead. The Lib Dem MP enquired “what estimate he has made of the number of members of defined benefit pension schemes with pre-1997 service who have received no discretionary pension increases in the last ten years; and what steps he is taking to encourage sponsoring employers and trustees to grant discretionary increases to pre-1997 pension benefits.”
Torsten Bell addressing MPs in the House of Commons (Image: undefined)
Mr Bell responded that a substantial number of people in private sector defined benefit schemes receive no inflation-linked increases for pre-1997 payments. He stated: “Analysis published by the Pensions Regulator indicates that, as of March 2023, around 17 per cent of members of private sector defined benefit pension schemes do not receive any pre-1997 indexation on benefits.”
Nevertheless, he indicated that modifications were under way which could assist those affected. He explained: “Reforms in our Pension Schemes Bill will enable more trustees of well-funded defined benefit pension schemes to share surplus with employers, and deliver better outcomes for members, and benefit the wider economy, unlocking some of the estimated £160 billion of scheme surplus. 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.”
In practical terms, this concept is more straightforward than it initially appears. The people responsible for managing these pension schemes – the trustees – would receive assistance through legislative amendments to distribute funds currently locked within defined benefit schemes that possess substantial surpluses with employers, provided pension members remain safeguarded. Mr Bell believes this would stimulate the economy by releasing capital presently invested in assets like bonds, redirecting it for more productive use within the UK economy.
However, it could also result in scheme members receiving enhanced benefits. Mr Bell explained: “The Pension Regulator already sets out that trustees should consider the situation of those members who would benefit from a discretionary increase and whether the scheme has a history of making such awards. The Regulator will be producing further guidance on surplus sharing once the legislation is in place.”
