Defined Benefit pre 1997 Pension Increases

PeterA59

Dear MSE Forum Members,

This is my first Post so please forgive if it is not to the best standards.

I am fortunate to benefit from a company Defined Benefit Pension but like many others do not receive increases in the pension accumulated in the years before 1997. I have researched this topic and found a 17th January 2017 House of Commons debate in respect of the Digital Equipment Ltd. Pension Scheme. I also found significant information on their struggle on the HPPA website.  This is clearly a long running issue that affects I believe up to a million pensioners who receive 0% increases. I appreciate there are a number of issues to consider e.g.. Is the fund is surplus? Is the sponsoring company profitable? But many pensioners have seen their pensions frozen for many years or drop in real terms by 30 to 50%. I also found cases dealt with by the Pensions Ombudsman who ruled that the ‘discretion’ lies with the Sponsor and they don't have to distribute any surplus.

It would appear that many Companies are refusing discretionary increases and it would require legislation to force some form of indexation for these pensions.  Is there a Group I could join that is raising this topic to the appropriate levels?

Thanks.

PeterA59

xylophone

See this briefing note issued October last year.


https://researchbriefings.files.parliament.uk/documents/SN05656/SN05656.pdf

Before 1997, only contracted out pension rights, which replace the additional State Pension, were required to be indexed. However, many pension schemes voluntarily provided indexation on pensions accrued before 1997. If scheme rules provide for increases on pensions in payment earned before April 1997, those increases must continue to be paid.

Pensions legislation does not usually apply new provisions retrospectively to rights that have already been accrued. It is generally seen to be unreasonable to add liabilities to pension schemes that could not have been taken into account in the funding assumptions that determined the contributions to be paid at the time.

There are no current plans to change these arrangements.

https://www.thisismoney.co.uk/money/pensions/article-10833261/Will-old-employer-voluntarily-increase-pension-inflation-soars.html 

may be of interest.

You have seen this?

https://committees.parliament.uk/writtenevidence/126410/html/

Marcon

PeterA59 said:

Dear MSE Forum Members,

This is my first Post so please forgive if it is not to the best standards.

I am fortunate to benefit from a company Defined Benefit Pension but like many others do not receive increases in the pension accumulated in the years before 1997. I have researched this topic and found a 17th January 2017 House of Commons debate in respect of the Digital Equipment Ltd. Pension Scheme. I also found significant information on their struggle on the HPPA website.  This is clearly a long running issue that affects I believe up to a million pensioners who receive 0% increases. I appreciate there are a number of issues to consider e.g.. Is the fund is surplus? Is the sponsoring company profitable? But many pensioners have seen their pensions frozen for many years or drop in real terms by 30 to 50%. I also found cases dealt with by the Pensions Ombudsman who ruled that the ‘discretion’ lies with the Sponsor and they don't have to distribute any surplus.

It would appear that many Companies are refusing discretionary increases and it would require legislation to force some form of indexation for these pensions.  Is there a Group I could join that is raising this topic to the appropriate levels?

Thanks.

PeterA59

Pension schemes are funded on the basis of the benefits promised under the rules. The idea of introducing retrospective legislation would place a substantial burden on employers, who would have to foot the bill. However profitable they may be now, there's no guarantee that level of profitability would continue. The same applies to the funding position of the scheme; it may be technically in surplus, but that position fluctuates the whole time, and again, it would be the sponsor who would be on the hook for deficit repair contributions when things don't look so rosy.

There are also significant issues with any such legislation where a scheme has been 'bought out' with an insurer. Virtually all discretions are removed during a buy out, so who would foot the bill? The trustees and employer aren't going to, and the insurer won't either, so that's a non-starter.

You are getting the benefits you were promised under the scheme. I appreciate that must feel like cold comfort, but it is a considerably better deal than many scheme members whose employer failed.

That said, have you actually contacted your former employer to raise the point and asked if they will consider making a one-off discretionary increase - although be aware that 'one off' is something of a misnomer, since once the increase has been given, it will be payable for all future years.

PeterA59

Xylophone and Marcon

Thank you for your comments and links. Yes I was aware of the attempts to establish a ‘code of conduct’.  I would raise one issue about my Scheme that may or may not be applicable to others; the funding of the Scheme by 1997 showed a surplus which had been accumulated during the high returns on investments in the 80s/90s despite payment holidays etc. The 1997 assets account for approximately 90% of the current total assets of the Scheme.  The contributions made since 1997 have not seen the same significant growth and I would argue were not sufficient for the indexation promised under the Rules had they been a separate Scheme. The post 97 indexation is funded therefore by assets accumulated pre 97. This doesn’t seem fair to those who contributed to the assets pre 97 but have had no increases for several years. For your information, contributions were unchanged post 1997. I note the point regarding buyouts but I believe most contain an ‘insurance’ clause that the employer would be responsible for any changes that disrupt the buyout funding of the Scheme. I also note that ‘promises’ and ‘Rules’ are very different.  Our Scheme ‘promised’ to protect pensions against inflation and made RPI increases, reducing to CPI increases to pre 97 until 2016. The fund was in deficit from around 2001, closing 2010.  Yes contact has been made with the employer and discussions continue but as always it relies on goodwill and a willingness to help previous staff who contributed to the success of the company.

Marcon

PeterA59 said:

Xylophone and Marcon

Thank you for your comments and links. Yes I was aware of the attempts to establish a ‘code of conduct’.  I would raise one issue about my Scheme that may or may not be applicable to others; the funding of the Scheme by 1997 showed a surplus which had been accumulated during the high returns on investments in the 80s/90s despite payment holidays etc. The 1997 assets account for approximately 90% of the current total assets of the Scheme.  The contributions made since 1997 have not seen the same significant growth and I would argue were not sufficient for the indexation promised under the Rules had they been a separate Scheme. The post 97 indexation is funded therefore by assets accumulated pre 97. This doesn’t seem fair to those who contributed to the assets pre 97 but have had no increases for several years. For your information, contributions were unchanged post 1997. 

I can see your logic (and sympathise with it, although my answer may not sound that way), but the reality of DB schemes is that they are always fluctuating in value, and when the assets were built up isn't normally relevant. Members joined and paid the relevant contribution rates prevailing at the time of their active membership, in return for which they (should) receive the benefits promised by the rules of the scheme. Would you be happy to receive reduced benefits if the scheme just happened to have been in deficit while you were an active member...?

PeterA59 said:

I note the point regarding buyouts but I believe most contain an ‘insurance’ clause that the employer would be responsible for any changes that disrupt the buyout funding of the Scheme. 

I'm not sure what exactly you are thinking of (possibly a buy in, which is the prelude to a buy out? During that phase, the insurance policy is simply an asset of the scheme and the employer is still responsible for any deficit which arises), but once all data cleansing has concluded, a final price been agreed with the insurer, and the buyout has actually happened, that's the end of the matter for the employer and trustees. The employer won't be paying anything more. The insurer has been paid an agreed amount of money to pay specific benefits, so they won't be making discretionary increases. In other words, there is nobody who is going to fund 'extra' benefits.

So despite your opening post saying you do not receive increases:

PeterA59 said:

I am fortunate to benefit from a company Defined Benefit Pension but like many others do not receive increases in the pension accumulated in the years before 1997.

PeterA59 said:

I also note that ‘promises’ and ‘Rules’ are very different.  Our Scheme ‘promised’ to protect pensions against inflation and made RPI increases, reducing to CPI increases to pre 97 until 2016. The fund was in deficit from around 2001, closing 2010.  Yes contact has been made with the employer and discussions continue but as always it relies on goodwill and a willingness to help previous staff who contributed to the success of the company.

it sounds as if you did receive increases until 2016? What changed?

Doubtless many employees from pre-1997 did indeed contribute to the success of the company - but that was over a quarter of a century ago, and they were paid during their employment for their contribution, both by means of immediate rewards and the deferred 'pay' of their pension. If the scheme was in deficit from 2001, then the employer will have had to fork out hefty deficit repair contributions, so it isn't especially surprising they don't want to put themselves in that position again. 

Having said all that, I hope the employer will be willing to do something for those in your position.

PeterA59

 Marcon said:

I can see your logic (and sympathise with it, although my answer may not sound that way), but the reality of DB schemes is that they are always fluctuating in value, and when the assets were built up isn't normally relevant. Members joined and paid the relevant contribution rates prevailing at the time of their active membership, in return for which they (should) receive the benefits promised by the rules of the scheme. Would you be happy to receive reduced benefits if the scheme just happened to have been in deficit while you were an active member...?

I'm not sure I have fully understood the question but I will try to answer this point.  When the Scheme was in surplus and I was working, I benefited from payment holidays and benefits were improved for new pensioners (reduction in retirement age) and pensions in payment (consistent increases for pre and post 97). Once a deficit was evident and continued, the Scheme continued to make increases to pre 97 but at the more standard CPI capped at 3%. I do not recall any significant reversal of others benefits (excluding annual increases) but there are triannual amendments to the early and late retirement factors which presumably reflect the 'value' of the fund at the time of retirement. In effect you can receive reduced benefits based on the applicable factors. Of course no one would be happy to receive less than 'promised' 3 years earlier but it is feasible your final pension is less than previous quotations.

So despite your opening post saying you do not receive increases:

PeterA59 said:

I am fortunate to benefit from a company Defined Benefit Pension but like many others do not receive increases in the pension accumulated in the years before 1997.

PeterA59 said:

I also note that ‘promises’ and ‘Rules’ are very different.  Our Scheme ‘promised’ to protect pensions against inflation and made RPI increases, reducing to CPI increases to pre 97 until 2016. The fund was in deficit from around 2001, closing 2010.  Yes contact has been made with the employer and discussions continue but as always it relies on goodwill and a willingness to help previous staff who contributed to the success of the company.

 

it sounds as if you did receive increases until 2016? What changed?

I think the easiest answer to this is that Management changed.  They are not members of the Scheme and I'm sure see it as a 'burden' on the business.  The 'gentlemen's' agreements of the past have been forgotten and there appears to be no one on the Board who is prepared to stand up for previous employees. I am a recent retiree and therefore have only seen 0% since I retired. Many older retirees advise that there was an expectation that pre 97 increases would continue for life but as there is no formal Rule to this effect then the company is within its rights to refuse such increases.

Marcon

PeterA59 said:

 When the Scheme was in surplus and I was working, I benefited from payment holidays and benefits were improved for new pensioners (reduction in retirement age) and pensions in payment (consistent increases for pre and post 97). 

So those who were working for the company and helped to built its future success 'back in the day' did benefit from the funding position of the scheme while they were employed, by having payment holidays and a lower normal pension age - the latter in particular is hugely valuable.

Once a deficit was evident and continued, the Scheme continued to make increases to pre 97 but at the more standard CPI capped at 3%. I do not recall any significant reversal of others benefits (excluding annual increases) but there are triannual amendments to the early and late retirement factors which presumably reflect the 'value' of the fund at the time of retirement. In effect you can receive reduced benefits based on the applicable factors. Of course no one would be happy to receive less than 'promised' 3 years earlier but it is feasible your final pension is less than previous quotations.

Not the value of the fund per se; when early and late retirement factors are reviewed and changed, it is to reflect market conditions at the time of retirement. 

 

PeterA59 said:

it sounds as if you did receive increases until 2016? What changed?

I think the easiest answer to this is that Management changed.  They are not members of the Scheme and I'm sure see it as a 'burden' on the business.  

That's rather what I was expecting you to say - that, or a change in the major shareholders. The pension scheme is a burden on the business, even though it is closed. The employer foots the substantial costs of running the scheme (even if the scheme technically pays its own costs, it's still the employer who is the paymaster and will have to top up the funding if the scheme goes into deficit) and the scheme impacts on the employer's financial statements.

If the company agrees to a discretionary increase, that hits their P&L (even if the scheme is in surplus) - reducing profits for the year, with all that implies. The costs of even quite a modest increase can be very substantial.

PeterA59

Thank you for your swift and detailed replies. I wasn’t expecting a golden solution to the issue but it is good to discuss the matter with people of in-depth knowledge on the topic. If there are any changes to the situation then I will be back to share further. 

ewaste

The problem with any discretionary increase is that it's an ongoing additional liability that often compounds, it's not a one-off annual 'bonus' payment.

There is zero fairness to newer employees who likely don't get the benefit of a DB scheme. However it's their labour that retired members are essentially asking for with no compensation. They've arguably already been doing that given the liability present on the sponsors balance sheet and any previous deficit contributions. 

What does the current employer DC scheme look like and what do they contribute? 

Even if the scheme was in surplus it's still an ongoing liability and drag on the sponsors balance sheet. That will probably continue to be the case until a buy out surplus can be achieved then as mentioned any hope of a discretionary increase likely vanishes. I'd certainly argue that if a surplus could fund a buy out on more favourable terms then that should be the case. 

Edit:- I'd also add that the idea of aggregating and 'running on' schemes in a Superfund or similar should be explored. It has the potential to produce better outcomes than buyout while removing the liability from the sponsoring employers. 

Marcon

ewaste said:

Even if the scheme was in surplus it's still an ongoing liability and drag on the sponsors balance sheet. That will probably continue to be the case until a buy out surplus can be achieved then as mentioned any hope of a discretionary increase likely vanishes. I'd certainly argue that if a surplus could fund a buy out on more favourable terms then that should be the case. 

You might, but the employer and/or trustees might not....see https://www.pensions-ombudsman.org.uk/decision/2023/cas-92093-n4d9/water-companies-pension-scheme-bristol-water-plc-section-cas-92093

ewaste said:

Edit:- I'd also add that the idea of aggregating and 'running on' schemes in a Superfund or similar should be explored. It has the potential to produce better outcomes than buyout while removing the liability from the sponsoring employers. 

Interesting read: https://commonslibrary.parliament.uk/pension-superfunds-a-new-choice-for-pension-schemes/

PeterA59

Thanks for your comment. There is no suggestion that current employees would be disadvantaged by our quest on pre 97 increases. The DC scheme starts with an employee/employer split of 3/10% rising to potential of 8/15% or 23% for those who make additional matched contributions. I am concerned that the DB scheme surplus will not be distributed in order to make the fund more attractive for buyout rather than helping pensioners. I would also like to point out that the pre 97 liability is decreasing rapidly and the cost of any increases may not be as great as some fear. Our latest best guess is around 7% of the fund’s liabilities to provide a cpi capped at 3% but obviously we don’t have access the actuarial figures and I would welcome anyone’s input from other funds as to the likely costs.