The Department for Work and Pensions (DWP) has announced a significant reform that will increase pension payments for approximately 256,000 people across the UK. The change, unveiled by the Labour government, targets members of defined benefit pension schemes who have been disadvantaged by historical rules.
Addressing a 28-Year-Old Anomaly
The core of the issue dates back to 1997, when new regulations were introduced to ensure that payments from such schemes increased annually in line with inflation. However, for pension rights accrued before April 1997, indexation was not always mandatory. This meant that for some savers, the real value of their pension pot was eroded by inflation over time.
Now, the government is acting to correct this. DWP minister Torsten Bell confirmed the change, stating it will apply to compensation paid by the Pension Protection Fund (PPF) and the Financial Assistance Scheme (FAS).
Who Will Benefit From The Change?
The update will directly impact two key groups. Around 165,000 members of the PPF and approximately 91,000 current members of the FAS are set to gain. They will benefit if their original pension scheme provided mandatory indexation on pre-1997 benefits.
From now on, their compensation payments for pensions built up before 6 April 1997 will be linked to the Consumer Prices Index (CPI), with increases capped at 2.5%. Mr Bell emphasised this change will apply prospectively, meaning it affects future payments.
This move addresses a notable gap. Analysis from the Pensions Regulator indicates that as of March 2023, about 17% of members in private sector defined benefit schemes do not receive any pre-1997 indexation.
Unlocking Surplus for Broader Benefits
The announcement is part of a wider set of pension reforms. The forthcoming Pension Schemes Bill will also enable trustees of well-funded defined benefit schemes to share surplus funds with employers. This could unlock an estimated £160 billion in surplus across the sector.
As part of any agreement to release surplus, trustees will be in a stronger position to negotiate extra benefits for members. This could include discretionary indexation increases, offering further potential boosts to pension incomes. The Pensions Regulator is set to provide new guidance on surplus sharing once the legislation is enacted.
This combined approach aims to deliver better outcomes for pension scheme members while also providing a potential boost to the wider economy through the reinvestment of surplus funds.
