pension increases if inflation is negative

aah

Hi there
I'm in a pension scheme where annual interest is paid at the rate of inflation in the September of any given year (I think the increase is actually paid in April).

Just wondering what will happen to the pension if the rate of inflation is negative. Surely it wouldnt decrease?

Any help out there? It is the LGPS by the way...

many thanks

SnowMan

Unlikely to decrease. Have a look here at question 3 which says


"I have a public sector pension which increases each April in line with the Retail Price Index (RPI). If the RPI is negative this September what will happen to my pension?

Under the provisions of the Pensions Act 1995 it is normally not permissible to reduce pensions in payment from an occupational scheme. This protection may also be provided for specifically for in the rules of the scheme.

So although I do not know which particular public pension scheme Graham is a member of, I think it is extremely unlikely his pension will be reduced in the event of the RPI remaining in negative territory in September this year.

It is perhaps worth mentioning that this may not be the case for those people whose pension is provided for in an RPI linked annuity. Some annuity providers have already indicated that where the contract allows them to do so they will reduce pension payments where appropriate in line with the RPI.

The Government has reaffirmed that regardless of the rate of the RPI, increases to the state pension will not be lower than 2.5%. "

MrChips

Correct, pensions provided by a DB scheme will not be reduced. Reducing pensions actually counts as an "unauthorised payment" by HMRC and would incur tax penalties.

jh2009

Agree with all of the above.

If inflation is negative, then it is likely a 0% increase would be applied, depending on scheme rules. The state pension has a minimum 2.5% increase as stated above.

A further two points to make........

If the RPI is negative in september (eg -1.5%), then you could even argue that a 0% increase is in fact.............. an increase! (as if the pension properly tracked RPI you would get a cut in your pension, so freezing and giving no increase is in theory leaving the pensioner better off).

The rise given this year of 5% to many pensioners was based on RPI peaking last september (which fortunately for them is the month that is used for the calculation of the increase paid in april). When it was paid i warned my Father that he may at that time be getting two years increases at once, as if a zero increase is applied next year then in theory he will average a 2.5% increase over the two year period.

MikeJones_2

Increases to pensions in payment
I agree with the above comments in respect of increases awarded to pensions in payment (also referred to as 'escalation'). In particular it is highly unlikely that any public sector scheme would (even if it could) reduce pensions in payment.

But it is unclear yet, certainly for some private sector defined benefit schemes, what would happen where inflation was, say, -1.5% this year, followed by, say, +2.6% next year.

It might, for example, be possible under some Scheme Rules to not grant an increase for 'this' year (based upon the deflation year of -1.5%). However, next year, it might be possible to pay either (i) the +2.6% or (ii) just 1.1% (i.e. offset the negative against a future positive; 2.6% - 1.5% = 1.1%).

Scheme Rules can be complex and it will be interesting to see what actions are taken (if any) under these unusual circumstances of deflation.

Increases to pensions in deferment
However, it may not be as straightforward for preserved pensions (where a person has ceased to be an active member of the pension scheme).

Preserved pensions 'revalue' between (a) the date of leaving (or date of ceasing to be an active member) and (b) Normal Retirement Date.

The rate of revaluation will depend upon when '(a)' occured, and of course precisely what the Scheme Rules state.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

aah

thanks for all your comments folks, corroborating what I understood in the main, for public sector pensioners like me.

Very interesting point Mike about deferred pensioners and time only will tell. I guess

Debt_Free_Chick

MikeJones wrote: »

Increases to pensions in deferment
However, it may not be as straightforward for preserved pensions (where a person has ceased to be an active member of the pension scheme).

Preserved pensions 'revalue' between (a) the date of leaving (or date of ceasing to be an active member) and (b) Normal Retirement Date.

The rate of revaluation will depend upon when '(a)' occured, and of course precisely what the Scheme Rules state.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Mike

Spot on, as I would expect

My recollection - although it's been a while since I've had cause to check this - is that the regulations regarding revaluation in deferment only require that the revaluation is cumulative i.e. you look at the whole period from date of leaving to date of retirement.

As you say - it's important to have regard to scheme rules and the administrators should be asked to confirm.

MikeJones_2

Hi Debt_Free_Chick,

Debt_Free_Chick wrote: »

My recollection - although it's been a while since I've had cause to check this - is that the regulations regarding revaluation in deferment only require that the revaluation is cumulative i.e. you look at the whole period from date of leaving to date of retirement.

That's absolutely right and it never ceases to amaze me how many people don't realise that where inflation exceeds 5% in any one year, this can be included in the cumulative revaluation so long as the overall effect is that revaluation does not exceed 5% p.a. over the whole length of the revaluation period.

I often see people quote revaluation for preserved pensions as 'RPI up to 5% p.a.' (or some quote very similar). In fact, it is more correct to quote revaluation as '5% p.a. or RPI if lower'.

A minor point, some might say, given that you'd have to go back to July 1991 since RPI exceeded 5%.

SnowMan wrote: »

It is perhaps worth mentioning that this may not be the case for those people whose pension is provided for in an RPI linked annuity. Some annuity providers have already indicated that where the contract allows them to do so they will reduce pension payments where appropriate in line with the RPI.

As if to reinforce SnowMan's timely comment:

RPI-linked annuities sink further with deflation (Money Marketing)

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

scottiepaul

MikeJones wrote: »

Increases to pensions in payment
I agree with the above comments in respect of increases awarded to pensions in payment (also referred to as 'escalation'). In particular it is highly unlikely that any public sector scheme would (even if it could) reduce pensions in payment.

But it is unclear yet, certainly for some private sector defined benefit schemes, what would happen where inflation was, say, -1.5% this year, followed by, say, +2.6% next year.

It might, for example, be possible under some Scheme Rules to not grant an increase for 'this' year (based upon the deflation year of -1.5%). However, next year, it might be possible to pay either (i) the +2.6% or (ii) just 1.1% (i.e. offset the negative against a future positive; 2.6% - 1.5% = 1.1%).

Does anyone know what things are looking like with this currently?

i.e. if there is a -1.5%, and so the pension increase is 0% this year, if the following year there is an increase of 1.5%, does an occupational pension scheme have to pay out 1.5% increase, or can it off-set that 1.5% and thus freeze the pension increase again?

Would this not count as a breach of the Pensions Act 1995 by failing to increase the pension at least in line with RPI?

jh2009

The answer to this can best be answered direct by the scheme in question as it depends on the rules that apply.

BUT............My scheme i work for looks at the position on an annual basis only.

So this year its the difference between Septs 08/09. Next year its the difference between Septs 09/10.

In my scheme last years increase is irrelevant. If the change is 1.5% next year we will pay 1.5%, if its -1.4% again then no increase again, and i suspect this is the case with many private schemes.

Im sure if you ask your scheme direct they can confirm how they operate their rule.

MrChips

I'm pretty sure for pensions accrued after 5 April 1997 the pension will have to be increased looking only at that year's inflation (i.e. ignoring any offset of deflation in a previous year).

However for pension accrued prior to 6 April 1997 (in excess of GMP) I think it will depend on the wording in the Scheme Rules. In a lot of cases, the award of any increase at all is purely discretionary and in this case the Scheme could choose to offset previous deflation (or indeed choose to award no increase at all again if the funding level of the Scheme is poor).