deferred DB pension Revaluation. Are the 5%, 2.5% limits compounded? Also partial years.

Kim1965

I recieve a Statement every year for my deferred dbpension (indexed to a max of 7%rpi), it gives the annual pension value at date of leaving the scheme (2001), and its current value. I always assumed this meant the inflation indexing was done yearly. The increases vary, and seems to follow the inflation rate of the previous year. This seems to be the opposite to what is being said? 

german_keeper

Kim1965 said:

I recieve a Statement every year for my deferred dbpension (indexed to a max of 7%rpi), it gives the annual pension value at date of leaving the scheme (2001), and its current value. I always assumed this meant the inflation indexing was done yearly. The increases vary, and seems to follow the inflation rate of the previous year. This seems to be the opposite to what is being said? 

Have you done any calculations with the figures? If RPI has not been above 7% during that period then it doesn't make a difference. Even if it has then the year(s) that it has been above 7% may have been increased by the actual RPI amount rather than 7% based on this "averaging" or "countback" rule. Hope that makes sense, don't know if there is a more official term.

Just on the point of the annual statement you may be quite fortunate to receive it. My wife's DB pension administrator have informed us previously that they don't legally need to do that. And they don't!!

hyubh

Kim1965 said:

I recieve a Statement every year for my deferred dbpension (indexed to a max of 7%rpi), it gives the annual pension value at date of leaving the scheme (2001), and its current value. I always assumed this meant the inflation indexing was done yearly. The increases vary, and seems to follow the inflation rate of the previous year. This seems to be the opposite to what is being said? 

A scheme is free to give greater than statutory if it wants, and on whatever basis (in which case statutory will act as an underpin). Especially if you exclude private sector schemes that adopt a public sector style approach, schemes doing above statutory revelation is rare, but do exist.

QrizB

Pensions_matter_2 said:

I hope its ok to hijack this thread to ask a further very technical question - when working out the compounded maximum limit possible for revaluation (applying 2.5% or 5%, as the case may be), is the figure rounded up or down to arrive at the final figure - for instance, if the cumulative compounded figure arrived at over x number of years was, say, 13.378, should this be rounded up (13.39) or down (13.37) when working out if the actual inflation figures over the period exceed or do not exceed this limit. Hope that makes sense! Its kind of relevant given this years CPI figure (applied if retiring next year) is likely to be very high.

Why would you round at all, at least until you get to a cash value where you might round to the nearest penny?

NedS

german_keeper said:

Kim1965 said:

I recieve a Statement every year for my deferred dbpension (indexed to a max of 7%rpi), it gives the annual pension value at date of leaving the scheme (2001), and its current value. I always assumed this meant the inflation indexing was done yearly. The increases vary, and seems to follow the inflation rate of the previous year. This seems to be the opposite to what is being said? 

Have you done any calculations with the figures? If RPI has not been above 7% during that period then it doesn't make a difference. Even if it has then the year(s) that it has been above 7% may have been increased by the actual RPI amount rather than 7% based on this "averaging" or "countback" rule. Hope that makes sense, don't know if there is a more official term.

Just on the point of the annual statement you may be quite fortunate to receive it. My wife's DB pension administrator have informed us previously that they don't legally need to do that. And they don't!!

I agree, they are likely giving you a compounded figure each year from 2001 when you left the scheme up until that year, and as @german_keeper says, unless the annual inflation figure exceeded the annual cap, you wouldn't see the difference anyway. You may well see the difference this year though whereby you may see an increase of more than the 7% cap compared to last years value due to the compounding.

AlwaysLearnin

Pensions_matter_2 said:

I hope its ok to hijack this thread to ask a further very technical question - when working out the compounded maximum limit possible for revaluation (applying 2.5% or 5%, as the case may be), is the figure rounded up or down to arrive at the final figure - for instance, if the cumulative compounded figure arrived at over x number of years was, say, 13.378, should this be rounded up (13.39) or down (13.37) when working out if the actual inflation figures over the period exceed or do not exceed this limit. Hope that makes sense! Its kind of relevant given this years CPI figure (applied if retiring next year) is likely to be very high.

Playing about with the 2021 'Occupational Pensions (Revaluation) Order' numbers on the gov.uk site, it appears that they use standard rounding to get to the 1 decimal place number(s) that they list

Pensions_matter_2

Im not sure - applying factors from 2013 to 2022 for example (1.027 x 1.012 etc up to x 1.031) produces 1.1666, but the revalution order says 16.6?  I might have got the calculation wrong though! Its not vital to know in the scale of things, but Im trying to work out in advance what pension Im likely to get based on an estimated CPI inflation figure for September 2022.

snowlaser

Pensions_matter_2 said:

Im not sure - applying factors from 2013 to 2022 for example (1.027 x 1.012 etc up to x 1.031) produces 1.1666, but the revalution order says 16.6?  I might have got the calculation wrong though! Its not vital to know in the scale of things, but Im trying to work out in advance what pension Im likely to get based on an estimated CPI inflation figure for September 2022.

I wondered if they went right back to the actual CPI index:
Sep 2021 CPI index / Sep 2012 CPI index
= 112.4 / 96.5
= 1.1648

Which would imply 16.5.  So 16.6 certainly seems in the right ballpark but precisely what rounding they use I don't know.

Also worth saying that the rules on revaluation do vary over time and from scheme to scheme, so not EVERY scheme will use these exact revaluation orders (even though a lot do use them).

AlwaysLearnin

Pensions_matter_2 said:

Im not sure - applying factors from 2013 to 2022 for example (1.027 x 1.012 etc up to x 1.031) produces 1.1666, but the revalution order says 16.6?  I might have got the calculation wrong though! Its not vital to know in the scale of things, but Im trying to work out in advance what pension Im likely to get based on an estimated CPI inflation figure for September 2022.

What did you use for the 2016 (Sep 2015) number?  Sep 15 CPI was -0.1%.  Using that I make it 16.55% (rounded), but using 0% for that year would give 16.67% (rounded).  Could that therefore be what's causing your difference?

My assumption was they include negatives as long as the relevant cumulative total is positive(?)

Pensions_matter_2

Thats interesting. I ignored the negative CPI figure for that year entirely. I have dug a bit deeper and the legislation refers to increases (or the maximum cap - 2.5/5% compounded - where this applies) only - it doesnt appear to envisage any negative CPI figure coming into the calculation. I take it that means its ignored. It may be the government has discretion in deciding about rounding up or down?