In the distant past, when a member left a final salary or career average scheme, the pension earned was frozen. This meant the pension was left to wither on the vine rather than enjoy the returns on the money invested. Anyone with an ounce of sense would expect the right to a stream of deferred pay to at least keep pace with inflation?

 

 

Government policy sought to change this acknowledging that employees who left work should be entitled to a better deal. After all contributions paid to the scheme would be invested between the date of leaving and retirement.

Initially this only applied to part of the scheme pension that related to contracting out of the State Earnings Related Pension Scheme (SERPS) or Guaranteed Minimum Pension (GMP). This obliged schemes to increase this part of the pension in line with legislation. Varying rates of increase were announced over the years, but notably between 1978 and 1988 this was 8.5% per annum. Over time this gradually reduced in line with expected returns on investments and interest rates.

This was extended to the non-GMP or excess pension in the 1980s and later improved in the 1990s, so that any leaver post 31 December 1990 could expect the excess pension to be revalued to the date of retirement. This was excellent news for any movers and shakers at this time, though still no change was made to level the playing field for those earlier leavers.

Although none of these improvements required anything to be done for people who left service before the changes were implemented, the Government was providing a strong indication that a leaver’s pension should keep pace with inflation. For this reason many schemes chose to give discretionary increases to the preserved pension of those who left before the legislation came into effect.

Recently the Government announced a minimum mandatory level of revaluation and increases based on a Consumer Prices Index (CPI) rather than the higher Retail Prices Index (RPI) for private sector schemes. This was justified as being a more appropriate measure of pension recipients’ inflation experiences and is also consistent with the measure of inflation used by the Bank of England.

Although this change will mean lower value pensions for many outraged retirees, can we expect good news for poor value frozen pensions and a level playing field for all retirees? After all CPI is deemed a more appropriate measure of pension recipient’s inflation experiences!

If you believe you are likely to receive a frozen pension from a previous employment there are a number actions you could take.

• Firstly contact the scheme administrator to establish the pension you will receive at retirement.
• Check that the pension has allowed for increases between leaving and retirement.
• Question if there are plans to improve the benefits of deferred members, rather than offer only a frozen pension.
• Refer to the recent Government announcement where they indicate that CPI is a more appropriate measure of pension recipient’s inflation experiences.
• Comment that this may be an opportunity for the trustees to offer fair value to all members, regardless of when they left the scheme.