Help in understanding inflationary increases to DB Pensions

carrspaints

Hoping someone can assist in understanding how DB Pension increases work.

I am 58 and have a deferred DB pension. I joined the scheme in September 2002 and became deferred in September 2017  The pension is capped as follows:

1. for pension earned between April 1997 and April 2005, an increase each year of Consumer Prices Index (CPI) inflation capped at 5%; and 
2. for pension earned since April 2005, an increase each year of CPI inflation capped at 2.5%.

• In September 2017 when I became a deferred member, the valuation was £10,999 if retiring at 65 on full pension.
• I received a quote in September 2021 and the retirement value at age 65 increased to £11,516.20
• An additional quote in September 2022 saw the retirement value increase to £14,246.09 (increase of £2,729.89)
  
• And today's quote has come in at £15,358.78 (an increase of £1,112.69 in 7 months)

Whilst today's quoted pension value is pleasing, it seems at odds with the 5% cap. Since September 2021, my DB pension forecast has increased by £3,842.58, or 33.3%)

The quotes are via Tower Watson ePA.

These numbers seem too good to be correct, but they are off generated quotes from the TW ePA website.

Am I missing something here? Thanks

zagfles

Yes, the main thing you're missing is that those increases you quote apply to pensions in payment. Revaluation in deferment works completely differently, the cap will be different, and the cap will apply across the whole period of deferment rather than on individual years. This means the odd year of high inflation is not capped provided the overall average inflation over the deferment period doesn't exceed the cap.

The figures still look quite high - the minimum revaluation orders are published each year eg see https://www.legislation.gov.uk/uksi/2022/1229/article/2/made but schemes can be better eg yours may use RPI rather than CPI. Check the scheme booklet/rules and there should be a separate bit on how pensions are increased in deferment. The minimums are inflation capped at 5% for pre April 2009 service and 2.5% post, where "inflation" is RPI up to 2011 then CPI.

The other thing to be aware of is timing, revaluation works on whole years so it changes on the anniversary of deferment, plus the revaluation tables used change at the turn of the calendar year.

See this thread and the one linked from it:

https://forums.moneysavingexpert.com/discussion/6381145/deferred-db-pension-revaluation-are-the-5-2-5-limits-compounded-also-partial-years/p1

DE_612183

Have you taken your pension? It's looks not "no" - in which case the % and caps do not apply.

The pot will go up and down depending on investment.

The actual value of payments you get once you claim will go up or down by the amount the provider deems fit - usually CPI as at some time the previous year, but capped.

carrspaints

Thanks for both replies.

DE_612183, I understand the CETV can go down, but being a DB pension, I thought the annual pension value at retirement age couldn't go down unless the pension provider went bust. I.e. DC pensions are invested in stocks/shares so ups & downs are a given. But DB pensions work differently. Forgive my ignorance here, pensions have always confused me, even when I thought I had got the hang of it.

zagfles

carrspaints said:

Thanks for both replies.

DE_612183, I understand the CETV can go down, but being a DB pension, I thought the annual pension value at retirement age couldn't go down unless the pension provider went bust. I.e. DC pensions are invested in stocks/shares so ups & downs are a given. But DB pensions work differently. Forgive my ignorance here, pensions have always confused me, even when I thought I had got the hang of it.

You are right, the PP was wrong, your pension won't go up and down with investment returns, it's a DB scheme so what you get out depends on the rules not investments. As you say unless the scheme and supporting employer goes bust in which case you'll end up in the PPF with worse terms.

Theoretically the pension can go down from a previous quote if inflation is negative, as above it works over the entire period of deferment rather than individual years.

xylophone

Check the scheme booklet/rules and there should be a separate bit on how pensions are increased in deferment. The minimums are inflation capped at 5% for pre April 2009 service and 2.5% post, where "inflation" is RPI up to 2011 then CPI.

The revaluation of the benefits has been discussed in earlier threads.

 

https://forums.moneysavingexpert.com/discussion/6384543/trying-to-understand-deferred-db-pension-benefits-value

He needs to check on whether RPI or CPI or a mixture of both is being used as the measure of inflation.

It appears that the OP has consulted the  scheme booklet as below (although perhaps not WTW themselves) but there is still no clarity on the RPI/CPI question. 

https://forums.moneysavingexpert.com/discussion/comment/79370930/#Comment_79370930

1. In broad terms these increases will usually be calculated using the statutory measure of inflation for the period from the date you left the Plan until the date you start to receive your pension. These increases are restricted to:

• A maximum of 5% per annum for your pension in respect of Pensionable Service before 6 April 2009;

• and A maximum of 2.5% per annum for your pension in respect of Pensionable Service after 5 April 2009. 
• 
  
• The increases to the pension are calculated on a compound basis with the cap applied to each year of increase.
  

carrspaints

So looking back at my pension "statement of benefits on leaving service", the following is stated:

"How will my pension increase between date of leaving pensionable service and Retirement/Death?"

"Your GMP (if any) will be increased between your date of leaving pensionable service and the earlier of your GMP age, your death, or your retirement date.

The pension in excess of GMP will revalue between your date of leaving pensionable service and date of retirement or death (or normal retirement date (NDR) if earlier).

Rate of Increase in deferment:

Pre April 1988 GMP - Fixed rate set by the government at your date of leaving, currently 4.75%

Post April 1988 GMP - Fixed rate set by the government at your date of leaving, currently 4.75%

Excess Pension accrued to 5th April 2009 - The lower of 5% or the increase in the Consumer Price Index

Pension accrued from 6 April 2009 - The lower of 2.5% or the increase in the Consumer Price Index

So it seems pension increases are CPI linked.

Zagfles mentioned what I was missing is that those increases I quoted apply to "pensions in payment". Again, pardon my ignorance but what is meant by "pensions in payment"?

I assumed that if I requested a quote from my pension provider for the value of pension if retiring at  65, the value I see in that quote is what I would receive at 65? WYSIWYG?

zagfles

carrspaints said:

So looking back at my pension "statement of benefits on leaving service", the following is stated:

"How will my pension increase between date of leaving pensionable service and Retirement/Death?"

"Your GMP (if any) will be increased between your date of leaving pensionable service and the earlier of your GMP age, your death, or your retirement date.

The pension in excess of GMP will revalue between your date of leaving pensionable service and date of retirement or death (or normal retirement date (NDR) if earlier).

Rate of Increase in deferment:

Pre April 1988 GMP - Fixed rate set by the government at your date of leaving, currently 4.75%

Post April 1988 GMP - Fixed rate set by the government at your date of leaving, currently 4.75%

Excess Pension accrued to 5th April 2009 - The lower of 5% or the increase in the Consumer Price Index

Pension accrued from 6 April 2009 - The lower of 2.5% or the increase in the Consumer Price Index

So it seems pension increases are CPI linked.

Zagfles mentioned what I was missing is that those increases I quoted apply to "pensions in payment". Again, pardon my ignorance but what is meant by "pensions in payment"?

I assumed that if I requested a quote from my pension provider for the value of pension if retiring at  65, the value I see in that quote is what I would receive at 65? WYSIWYG?

Ignore GMP, only applied to service up to 1997, and you started in 2002.

"pensions in payment" means after it starts being paid.

What you actually get at 65 is unknown as that would need a crystal ball to predict inflation between now and then. So what they usually do is give you what it would be based on current revaluation, ie in "today's terms".

Looking at the quoted figures there's a massive jump between Sept 2021 and 2022, 23% or so, that doesn't really make sense, it looked OK up to that point. Did something change eg did they correct their records, was there a court case or something?

xylophone

Painful as it will no doubt prove, (it seems that the patience of a saint is required)

https://forums.moneysavingexpert.com/discussion/comment/80013429/#Comment_80013429



 you are going to have to ask WTW to clarify the situation.

carrspaints

I am not aware of them correcting their records, I've certainly not had any communications from them in that regard. No court case I am aware of either.

This is a G.E. pension and the only thing that changed was that G.E. spun off their businesses, allocating the company’s savings and retirement plans across each of the three planned businesses. As part of the allocation process, G.E. mapped
each participant’s benefit under GE’s savings and retirement plans amongst the three businesses. But this all came into force January 1st, 2023, so would not explain the previous years jumps in pension quote values. Also, G.E. made it clear that these changes would have no impact on an individual's pension.

I agree, the big jumps recently don't make sense, hence my post.

I even got a quote on taking my pension today, 28th April 2023 (£9,403.62), which is 6.5 years before I would be entitled to full pension (£15,358.78) at 65. A similar quote I requested in 2021 for retiring in April 2023 was £7156.55.

Perhaps this one needs me calling Willis Towers Watson, although I'm not sure they would be able to (or allowed to) explain these rises.

xylophone

Perhaps this one needs me calling Willis Towers Watson, although I'm not sure they would be able to (or allowed to) explain these rises.

They cannot give you advice.

It is surely their job to explain the statements that they have issued and  the administrative process?

https://www.mygepension.com/help-and-advice