Why aren’t company pension plans forced to give people ‘triple-locked’ annual raises?

I am a retired 64 year old pensioner whose only source of income is my sickness pension from the employee benefit plan of a large financial company.

I retired in 1994 due to injuries sustained on the job and took the higher pension and not a lump sum because I thought my pension would increase in line with inflation, and for some time it did.

I was disappointed when the company changed the RPI increases to CPI as soon as the government made the change for state pension, and since then my purchasing power for pensions has been steadily declining.

In the past and before the change to CPI, we received periodic discretionary raises, but none have been paid out in recent years.

I have questions about why we retirees didn’t get a fair raise this year (we got 2.5 percent) when even the government kept its triple lock promise and gave 10 percent to state retirees.

1. Should we pensioners worry that our pensions are being mismanaged by a multi-billion dollar company that claims to be one of the best pension providers in the UK? Are they struggling financially and simply unable to pay their retired staff fairly?

2. Shouldn’t companies that have cut our raises to the lower, fairer to them, CPI index be required to follow the government’s triple lock system?

3 Finally, I would like to know if there is a mechanism in the latest pension reforms that would allow me to withdraw my pension and invest elsewhere, as it seems I can get a better deal elsewhere.

My concern stems mainly from the fact that I still have to wait more than a year for my state pension, and that I was struggling financially before inflation skyrocketed. With record inflation and these stingy pension increases, I’m struggling until my state pension kicks in.

Can you provide some clarity as to why retirees like me have seemingly been left to poverty?

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Steve Webb replies: I’m sorry to hear that you’re struggling due to the rise in the cost of living coupled with increases in your pension below inflation.

I will try to explain why your pension scheme acted this way and assure you that this is not a sign that your (former) employer is in financial difficulties.

As you know, the pension you are currently receiving is a so-called ‘defined benefit’ or salary-related pension.

These high-quality pensions were usually available to those working for larger companies and could in some ways be considered a ‘perk’, akin to offering a company car or subsidized canteen.

The crucial point is that companies were not at all obliged to offer such pensions. This means that, with one important exception, there is a limit to the extent to which the government can force employers to make these freely offered schemes more flexible.

The main exception to this is that occupational pensions were offered on an ‘outsourced’ basis, ie to replace part of the AOW pension that the employee would otherwise have accrued. The government can then set certain rules about the quality of the benefit pension you receive.

For example, employees who did not have a company pension started building up a supplementary AOW pension through the SERPS scheme from 1978 onwards.

But where an employer (such as yours) already provided a benefit pension, this could have led to ‘double provision’: accruing both SERPS pension and company pension.

To prevent this, occupational pension schemes were allowed to ‘outsource’ to SERPS. This allowed the company (and you as an employee) to pay a reduced rate of NI contributions. In return, the benefit pension had to match the SERPS pension that you would otherwise have accrued.

However, the requirements for outsourced arrangements to protect you against inflation in retirement were initially very limited.

Simply put, from 1978 to 1988 there was no duty to provide inflation increases, while from 1988 to 1997 they had to provide inflation protection of up to 3 percent.

Only for service after 1997, they must provide inflation protection of up to 5 percent (reduced to 2.5 percent in 2005).

If you retired in 1995, some of your employment probably falls under the 3 percent rule for employment after 1988, but anything before that date may not have statutory increases.

The point of all this is that the legal requirements for retirement plans to increase your pension in line with inflation at retirement are complex and limited. This means that, especially in times of high inflation, defined benefit participants may see an increase that is below the rate of inflation.

It is crucial that the pension scheme has been financed on the basis of these rules over a period of decades.

It would be rather unfair for the employer to suddenly say that because of the government’s policy on state pensions, the occupational pension scheme suddenly means everyone has to pay an extra 10 percent for the rest of his or her pension.

Pension schemes can, if they wish, pay supplements above the level prescribed by the rules of the regulations and above the level required by the outsourcing law.

These are called ‘discretionary’ raises. But, as the name suggests, they are not required to do this, and each scheme has its own rules on how and when it can be done.

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If a plan refuses to pay discretionary raises, it does not mean that the sponsoring employer is in financial difficulty.

For example, it may mean that the company believes that the defined benefit participants have had a fairly good pension provision (they have paid only a minority of the costs) and that they prefer to spend that money on the younger generation of employees. current employees or investments in the company.

As to your point about moving from the RPI measure of inflation to the CPI measure, it is true that CPI inflation is generally lower than RPI inflation and this will have saved schemes money.

On the other hand, pension schemes have to pay pensions for much longer on average than might have been expected in the past.

So there’s a mix of factors at work, some of which are improving the position of pension plans and others are deteriorating the position of pension plans, so you can’t just pick one and say that because of that isolated change you’re going to get a bigger increase.

Finally, because your benefit pension starts now, there is no mechanism to convert it back into a pension pot that you could then transfer.

If you have not yet started taking out your pension, there is usually the option of value transfer.

But it would be fair to say that regulators believe that for most people staying in the world of defined benefits with the greater degree of certainty it provides is a better bet than putting the value of your retirement into a defined contribution. (‘pot of money’) world and taking all risks on yourself.

If you would like to read more about the rules for inflation increases on pensions, including the move from RPI to CPI, the Library of the House of Commons has produced a helpful briefing which can be found here: Increases in occupational pensions (parliament.uk).