No support by BP for discretionary pension increase above the 5% cap in 2024

hugheskevi

coastline said:

Yeah not all DB pensions are gold plated as many people think. Maybe public sector but the private sector is very often subject to discretionary increases.

There is a fascinating (to some!) history of this area. I'd preface this by saying all of this is hearsay I have been told down the years, it was all before my time and I don't have any references so I can't assure accuracy.

Many years ago, probably about pre 1970s, the normal way employers and schemes managed their Defined Benefit pension schemes and financial risk was to have a lot of flexibilities in the scheme. These were particularly around indexation - if a company wasn't doing so well then no increases were paid, and when things improved increases were restored, and maybe even extra paid to make up for a past pause.

Prior to the mid 1990s, pension schemes were usually well funded, although the valuing of them may not have been as robust as it became after the 1990s. With the increase to corporate activity, well-funded pension schemes made their employers vulnerable to take-over activity, with new management coming in to asset strip. As a defence to this, many companies moved to elimate as much Trustee discretion as possible, trying to protect the pension scheme from any way of having surplus easily extracted. This led to many future difficulties for schemes being unable to easily respond to changing pension legislation, and a routine need for statutory overrides to be enacted when legislation changes.

Also, government legislation started to mandate things which were previously discretionary, eg, pension increases, preservation, GMPs, etc. Discretionary increases largely ended in 1997 with accruals from that year usually being capped indexation (although discretion above cap could be applied if desired). There was an increasing tension between companies not being obliged to provide any pension whatsoever, but if they did choose to do so then govt. legislation increasingly placing restrictions on what they must include.

All of the above led to schemes having much more limited ways to manage their funding by varying member benefits. As asset and bond markets took a turn for the worse in the mid to late 1990s and an extended period of low inflation prevailed, many schemes became underfunded for the first time, which in turn led to the establishment of the Financial Assistance Scheme and the Pension Protection Fund.

There was now increased rigour around valuation and protection of pensions. As liabilities rose, schemes became very large relative to the size of the sponsoring employer, and even small changes between assets and liabilities had very significant balance sheet implications. Hence employers moved to close schemes at a more rapid rate (along with other reasons).

A well-trodden path was established, of schemes first closing to new members, then maybe capping pensionable earnings, perhaps closing to all new accrual, pursuing a buy-in of an insurance contract to derisk some of the scheme, especially in relation to pension members, and eventually moving to full buy-out. In the absence of any other form of collective arrangement, Defined Contribution rose to take the place of Defined Benefit - first in the form of Group Personal Pensions and more recently Mastertrusts. That eventually led to the policy pursuit of Collective Defined Contribution - heavily favoured by Royal Mail in particular - to try to harness the benefits of collectivity that previous Defined Benefit pension provided, rather than everyone having their own individually managed pension pot.

The public sector hesitantly followed this path behind the private sector although not to the same extent and not to the same destination. In 2005 the Labour government planned to close existing schemes and move all members to a new scheme but then relented and did so only for new joiners. In 2015 the move of all members to the new schemes was made unlawful by exempting older members, so the move of everyone to new public service pension schemes only took place in 2022, and as a result of the error an additional £17bn of liabilties were created by having to give all eligible members a choice of schemes between 2015-22.

AlanP_2

Marcon said:

AlanP_2 said:

Be grateful you have a 5% cap, I had an old DB pension that was all discretionary increases apart from any statutory elements. 

Luckily I was able to take the CETV before it came in to payment but many ex-colleagues have had about a 1% increase over 12 years.

The CETV will have taken into account the lack of guaranteed increases, and been calculated on the basis of no increases - so the fact you transferred out doesn't automatically improve the position (probably the reverse!).

As you say pension terms were mo doubt a factor when the CETV was calculated but it was the best decision for us.

We have other DB pensions that will pay out about 5 times as much as this one would have done that, with 2 * SPs, will cover everything we will normally need to spend in retirement.

The CETV I took has been about 50% used for living expenses after tax at an effective net 15% which has allowed my wife to add extra to her AVC and SIPP and gain 40% tax relief.

Win / Win fortunately but not everyone would be in that lucky position I know.

xylophone

Some schemes are more generous than others - uncapped RPI....

And this non contributory pension from Imperial Tobacco is generous...

https://forums.moneysavingexpert.com/discussion/comment/80749238/#Comment_80749238