Maggie Rodger and John Flynn: A simple and principled reform would be to extend statutory indexation, at least on a limited basis, to all pre-1997 service
A nearly 30-year problem affecting three-quarters of a million pensioners is causing significant angst and growing cries of unfairness.
The incomes for some pre-1997 pensioners are being eroded by inflation, with no obligation on employers or schemes to provide pension increases, while post-1997 service for all members benefits from limited price indexation (LPI). This impact on pensioners income has been felt across a number of defined benefit (DB) schemes that are household names because of the lack of statutory inflation protection for pre-1997 service.
While trustees are bound by scheme rules and legislation, how should this be balanced with their moral duty to consider fairness as compared to members with post-97 protection for all, or the majority, of their service?
In March 2024, a group of affected members from the BP and Hewlett Packard pension schemes updated the Work and Pensions Select Committee about the impact this has had on former employees. At the time, The Pensions Regulator (TPR) was asked to identify how many schemes have only discretionary increases included in their trust deed and rules, and how that discretion had been exercised in recent years.
This lobbying group has now expanded and now covers another nine affected DB schemes, who last month held a briefing for MPs.
The consequences for members
The absence of indexation on pre-1997 accrual has a profound effect on members' living standards, with inflation steadily eroding the real value of their benefits. In purchasing power terms, that may equate to less than half the value it once represented.
Many members, particularly those who spent the bulk of their careers in a single scheme and for whom the bulk of their pension relates to pre-1997 service, face a slow and continuing erosion of income. Contrast this with employees who have the same length of service accrued after 1997 and are enjoying full inflation protection.
What is our fiduciary duty?
As trustees we are bound to operate within scheme rules and the statutory framework, but fiduciary responsibility extends beyond scheme governance and statutory compliance. We are also bound to act in members' best interests and to promote fair retirement outcomes. Both regulators and policymakers increasingly expect trustees to consider fairness and good member outcomes in their decision-making.
While some trustees will take the view that they have done what the law requires, that stance might be at odds with fairness and the spirit of the pension promise that recognised loyal service and was at the heart of the desire by sponsors to create DB schemes. And some trustees may have considered discretionary increases affordable for their scheme but had their proposals frustrated if the sponsor, with the power, did not consent.
Policy debate and affordability
The government has long resisted imposing compulsory uprating on pre-1997 pensions, citing affordability concerns for employers and schemes. However, DB schemes are now in a much stronger funding position.
With many DB schemes now in or approaching surplus, trustees are focused on deciding whether to run-on and potentially return the surplus to the sponsor, or to buyout with insurers, who will see that surplus enriching their bottom line.
Should that decision making first be informed by whether the surplus could be used to eliminate the inequity faced by pre-1997 members while there is still time for such a decision to make a real impact on their standard of living?
What about the PPF and FAS?
Pensioners receiving compensation from the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS) are also impacted by the pre-1997 issue. The PPF board does not have any legislative powers to pay indexation on compensation related to service before 6 April 1997 – and it would need legislative change to broaden what the PPF's reserves could be used for.
The case for reform
A simple and principled reform would be to extend statutory indexation, at least on a limited basis, to all pre-1997 service, making it consistent with post-1997 service. This would be both fair and manageable.
Trustees are not legislators, but we are influential voices in the pensions ecosystem. There is a Pension Schemes Bill under discussion and amendments of this nature have already been raised. So, now is the time for trustees to build the momentum for a legislative solution and end this long-standing unfairness.
Maggie Rodger and John Flynn are co-chairs of the Association of Member-Nominated Trustees (AMNT)
