The Department for Work and Pensions (DWP) has announced that a significant 256,000 people are set to receive higher pension payments following a major rule change. The reform will apply inflation-linked increases to certain pension entitlements accrued before April 1997 for members of two key safety-net schemes.
Who Benefits from the Pension Indexation Change?
DWP minister Torsten Bell confirmed to MPs that the policy shift will directly impact members of the Pension Protection Fund (PPF) and the Financial Assistance Scheme (FAS). These schemes provide support to individuals whose original company pension plans failed.
Bell stated that around 165,000 PPF members and a further 91,000 current FAS members will gain from the adjustment. The change specifically targets pension benefits built up before 6 April 1997 where the member's original scheme had provided mandatory indexation.
Closing the Pre-1997 Inflation Gap
The update addresses a long-standing disparity in pension indexation rules. Since April 1997, there has been a statutory requirement for pension payments from such schemes to increase annually in line with inflation, typically measured by the Consumer Prices Index (CPI).
However, for pension amounts accrued before that date, no such legal requirement existed. This meant payments for that portion of a person's pension could remain static for years, with inflation gradually eroding their real-world value. Some schemes offered discretionary increases, but these were inconsistent and not guaranteed.
Under the new rules, compensation payments for pre-1997 pension benefits will now be linked to CPI, capped at 2.5 per cent. Minister Bell emphasised that this change will be applied prospectively, not retrospectively.
Broader Context of Pension Reforms
The indexation change was initially announced by the Chancellor in the Budget. It forms part of wider pension reforms aimed at improving security and outcomes for savers.
Bell also highlighted measures within the Pension Schemes Bill designed to allow trustees of well-funded defined benefit pension schemes to share surplus funds with employers. The government estimates this could unlock portions of an estimated £160 billion in scheme surplus, potentially benefiting members and the wider economy.
This move by the DWP represents a significant step in harmonising pension compensation and protecting the value of savings for hundreds of thousands of people who rely on these vital safety-net arrangements.
