No support by BP for discretionary pension increase above the 5% cap in 2023

allsort

I'm a BP pensioner and received an update from the BP Pension Fund Trustee today.  It advises that, because of the prevailing economic situation of the highest inflation in the UK for 30 years, the Trustee decided it was appropriate to ask BP for consent to award a discretionary increase beyond the maximum 5% to which most members are entitled in line with inflation, which is measured by the rise in the Retail Price Index for the UK over the previous calendar year.  The Fund's finances are described as "very strong" but increases above the 5% level require BP's consent as they are neither envisaged nor guaranteed under the rules.

Very surprisingly (to me at least), given that in 3Q 2022, BP reported its biggest quarterly profit in 14 years, with underlying profits hitting $8.45bn (£6.9bn) between April and June - more than triple the amount it made in the same period in the previous year, BP declined to support a discretionary increase above the 5% cap, citing concern for a subset of BP retirees around the world "many of whom participate in retirement plans that are defined contribution in nature or do not have guaranteed pension increases" as the rationale for declining this request.

This is corporate genius - despite the BP Pension Fund Trustee stating that in its view "a discretionary increase was appropriate in current circumstances", BP manages to worm its way out of this on the grounds of concern for a subset of its global retirees.

It does the beg the question, "if not now, when"?  Presumably the answer to which is "never" and the concept of the discretionary pension increase in extraordinary times is just a ruse.

Grumpy_chap

allsort said:

I'm a BP pensioner and received an update from the BP Pension Fund Trustee today.  It advises that, because of the prevailing economic situation of the highest inflation in the UK for 30 years, the Trustee decided it was appropriate to ask BP for consent to award a discretionary increase beyond the maximum 5% to which most members are entitled in line with inflation, which is measured by the rise in the Retail Price Index for the UK over the previous calendar year.  The Fund's finances are described as "very strong" but increases above the 5% level require BP's consent as they are neither envisaged nor guaranteed under the rules.

Very surprisingly (to me at least), given that in 3Q 2022, BP reported its biggest quarterly profit in 14 years, with underlying profits hitting $8.45bn (£6.9bn) between April and June - more than triple the amount it made in the same period in the previous year, BP declined to support a discretionary increase above the 5% cap, citing concern for a subset of BP retirees around the world "many of whom participate in retirement plans that are defined contribution in nature or do not have guaranteed pension increases" as the rationale for declining this request.

This is corporate genius - despite the BP Pension Fund Trustee stating that in its view "a discretionary increase was appropriate in current circumstances", BP manages to worm its way out of this on the grounds of concern for a subset of its global retirees.

It does the beg the question, "if not now, when"?  Presumably the answer to which is "never" and the concept of the discretionary pension increase in extraordinary times is just a ruse.

The cap is there to protect the pension fund for the long term - current plus future retirees.
If the fund is over-paid now to current retirees, then the future fund is forever depleted, the company end up having to make additional contributions and the company folds under the weight of pension liabilities.  It is an oft-repeated scenario.

allsort

Grumpy_chap said:

allsort said:

I'm a BP pensioner and received an update from the BP Pension Fund Trustee today.  It advises that, because of the prevailing economic situation of the highest inflation in the UK for 30 years, the Trustee decided it was appropriate to ask BP for consent to award a discretionary increase beyond the maximum 5% to which most members are entitled in line with inflation, which is measured by the rise in the Retail Price Index for the UK over the previous calendar year.  The Fund's finances are described as "very strong" but increases above the 5% level require BP's consent as they are neither envisaged nor guaranteed under the rules.

Very surprisingly (to me at least), given that in 3Q 2022, BP reported its biggest quarterly profit in 14 years, with underlying profits hitting $8.45bn (£6.9bn) between April and June - more than triple the amount it made in the same period in the previous year, BP declined to support a discretionary increase above the 5% cap, citing concern for a subset of BP retirees around the world "many of whom participate in retirement plans that are defined contribution in nature or do not have guaranteed pension increases" as the rationale for declining this request.

This is corporate genius - despite the BP Pension Fund Trustee stating that in its view "a discretionary increase was appropriate in current circumstances", BP manages to worm its way out of this on the grounds of concern for a subset of its global retirees.

It does the beg the question, "if not now, when"?  Presumably the answer to which is "never" and the concept of the discretionary pension increase in extraordinary times is just a ruse.

The cap is there to protect the pension fund for the long term - current plus future retirees.
If the fund is over-paid now to current retirees, then the future fund is forever depleted, the company end up having to make additional contributions and the company folds under the weight of pension liabilities.  It is an oft-repeated scenario.

So what are the prevailing economic conditions that might be required to trigger an above cap increase ?  Full on economic armageddon ?  Or perhaps there are no instances in which this discretion would be exercised ?

Robin9

BP are not the only ones to apply a 5% cap - so has ESI

Marcon

Discretionary increases are just that: discretionary. Virtually all trust deeds have a provision which allows them to be awarded, but there are always strings attached, usually relating to the funding position of the scheme ('strong' does not mean 'awash with cash and able to stump up extra increases without the need for the employer to pump in more cash') and often a need for employer consent.

Trustees and employers have different roles and objectives, even if at least some of the directors sitting on each board are physically the same people. The Trustee would be failing in its duty not to at least ask the employer to consider a higher increase for pensioners at a time when inflation is running at well above the 5% to which pensioners are entitled under the rules.

The employer has declined to favour one group of pensioners over others in less generous schemes. Had they agreed to a rise of more than the amount stipulated in the scheme rules, they would have left themselves open to criticism from other pensioner groups (not just those in the UK) who have DC pensions or DB pensions without guaranteed increases. Had you been in one of those groups, might you not have felt miffed if one exclusive group trousered a bumper payout at a time when others were struggling?

xylophone

Why not a gesture across the board? And I don't mean just for the directors....

allsort

xylophone said:

Why not a gesture across the board? And I don't mean just for the directors....

Why not indeed ?  I concur. 
Doesn't seem unreasonable when BP's gross profits for the twelve months ending December 31, 2022 were up 74.32% on the previous year !!

gm0

Yes its obvious based on one years profits to lock in a permanent above the contracted amount increase which recurs forever.  and is the basis for further contracted increases thereafter.  Couldn't possibly go wrong and demand more input in years when the energy crisis doesn't happen.

If it is in runoff with a fixed dwindling group of DB pensioners without new accruals - then an uplift would be a one off but chunky set of cash for more gilts to match the increased liability curve to the actuarial end.   More plausible.  And looking after this particular group in a period of high inflation.  Would have to do the sums.

And yet they are right to consider rough equity across their pensioner and current employee groups. 
And don't want to have to fiddle in a load of different tax jurisdictions for said rough and ready equity by trying to make one off extra pension stuff happen in various places where it doesn't work like that normally.

Discretionary employee bonuses are easy.  Probably doing that.

And guess what - this scheme is likely already at the more generous end.

Are you sure you want them to start varying pension contributions for DC and uplifts for you with profits or would you be looking for a one way bet.  Only when its up.  Trust legalities make that hypothetical in many places. Ratchets and contracted terms abound.

As it goes - I would rather they didn't steal the divi and capital change on shares from my DC pension on an ongoing basis to do it. Because that's where the money (partly) comes from.  All of us other DC pensioners without index linked income blown on the wind of the stockmarket.  But you can see why above contracted increases is not an idea we would be very keen on spreading.  Lower market cap, EPS and dividends because the old DB crowd are gold plating their index linking beyond contract
Our source of core income feeding your extra beyond contracted increases.
Not going to have a large fanbase.

But oil company makes big profits in energy crisis this year.  Boo. Hiss. etc.  Whatever floats your boat.

OldScientist

gm0 said:

Yes its obvious based on one years profits to lock in a permanent above the contracted amount increase which recurs forever.  and is the basis for further contracted increases thereafter.  Couldn't possibly go wrong and demand more input in years when the energy crisis doesn't happen.

If it is in runoff with a fixed dwindling group of DB pensioners without new accruals - then an uplift would be a one off but chunky set of cash for more gilts to match the increased liability curve to the actuarial end.   More plausible.  And looking after this particular group in a period of high inflation.  Would have to do the sums.

A few thoughts:
On the one hand, the BP pension surplus dropped by about £800m at the end of 2022 (presumably, they held LDIs and were hit by the Truss mini budget) which may have made them cautious about future funding.

On the other, hand assuming the pension liabilities are largely matched with inflation linked gilts (which given the inflation linked payouts they are likely to be) and the scheme is still open to current members (I know it closed to new members more than a decade ago), then a small additional increase may be affordable (presumably the scheme actuaries, and trustees, would know).

Although it is no comfort to the OP, 5% inflation capping (and increasingly shifting to CPI rather than RPI) is not unusual (there are some schemes capped at the statutory minimum of 2.5%) and is ultimately better than the scheme failing and falling into the PPF (assuming BP is a member) where the capping is 2.5%.

jimbo620

Over the years BP has had several 'pension holidays' as in the company has not contributed to the fund. I understand the previous comment about protecting the fund for the future but what about an average BP pensioner who cannot supplement their income any more due to age...do they not have some responsibility or loyalty to their previous employees?

Another issue BP are looking at is to move to a CPI measure of inflation instead of the contracted RPI measure. Historically the CPI rate has always been below RPI so if they can break the rules then this will also be an effective cut in pension value

maisie_cat

Robin9 said:

BP are not the only ones to apply a 5% cap - so has ESI

and the TFL scheme for post 1987 joiners