Cap to index linking

Granadalad

Has legislation diluted the value of "index linked" pension schemes by imposing a cap (5 or possibly 2.5% I have heard) or is it whatever the provider states? I know BT Pension scheme had version A, B and C, with version C limited to 5%, but does parliament impose a cap? Interested for teacher pension too.

hugheskevi

Everything below relates to Defined Benefit schemes (ie final salary, career average, etc) not Defined Contribution (eg personal pensions, Stakeholder pensions, etc).

Has legislation diluted the value of "index linked" pension schemes by imposing a cap (5 or possibly 2.5% I have heard) or is it whatever the provider states?

Indexation is whatever the scheme rules say, subject to a minimum of RPI capped at 2.5% for future accruals. All historic accruals are unaffected by this.

I know BT Pension scheme had version A, B and C, with version C limited to 5%, but does parliament impose a cap?

Parliament only defines the minimum standard, BT can do whatever they want above that standard.

Interested for teacher pension too.

Almost certain this is RPI without a cap.

Granadalad

Useful reply thanks.

Does "RPI capped at 2.5% for future accruals" mean
'all schemes are now capped to 2.5%, although they might have increased handsomely up to now'
or
'old pension schemes will pay unlimited indexation but current schemes will be capped to 2.5%'

Hope this doesn't appear to be too silly a question, but I'm learning here.

hugheskevi

Does "RPI capped at 2.5% for future accruals" mean
'all schemes are now capped to 2.5%, although they might have increased handsomely up to now'
or
'old pension schemes will pay unlimited indexation but current schemes will be capped to 2.5%'

Neither

I think you might be getting confused thinking that a pension all increases at a single particular rate. That is not the case - an individual can easily have several slices of pension all being increased at different rates.

Indexation doesn't have anything to do with schemes as a whole, rather it is about an individual's pension.

Take 2 people as an example, one who worked from 2001-2005 then left the company and another employee who is currently employed and making pension contributions.

The first person who accrued benefits between 2001-2005 did so under whatever the scheme rules were at that time. Let's just say the rules were that benefits will be uprated by RPI capped at 5%. Therefore his pension will be increased by RPI capped at 5% regardless of any rule changes - these are referred to as his accrued rights.

The second person who is still building up rights - rights not yet built up are normally referred to as future accruals - will have indexation paid at whatever the scheme rules said on all his accrued rights as in the example above, but rights built up in the future can be indexed at a lower rate, eg 2.5% (but the scheme may choose not to reduce indexation, it is up to them).

Granadalad

I am enlightened!

Thank you