The story is a simple one. Hundreds of thousands of people who have defined benefit pension rights built up before 1997 have not and are not getting any increases on their DB pensions. Most pensioners in private sector DB plans are constrained to increases in their DB pensions capped at 2.5% and paid lower when CPI measured inflation is lower.
This is not a scandal, it is what it is, a difference between the gold plated fully inflation protected public sector scheme and the silver or chrome plated variants that private companies have offered their staff.
Many people working in a company who could claim “British” in their title, might once have been in a quasi-public sector scheme which over time became privatised. Think British Steel- Petroleum, Broadcasting Company, Telecom and many others. The lines are blurred, there are still crown guarantees, the Government bought out Royal Mail’s main scheme and stands behind the Mineworker’s scheme.
Questions of ownership are equally blurred. No member of these schemes felt they owned the deficit but they certainly fee they own some or all of the surplus. Most of the big public sector schemes that did not lose their shirts in September 2022 are now in surplus and contemplating whether to lock that surplus in by buying in insurance (or even buying out the scheme altogether). So far , they have proved generally too big for the insurers , but British Steel, once a £15bn scheme is now almost entirely insured by annuities.
But many people, including many pension trustees , see the bulk annuity as no better value for money as the individual annuity and are resisting annuitisation on the grounds that there is better value for members, the sponsor and the economy by running the pension scheme on , partially invested in the UK economy.
But back to the various plates on the pension. There are many who see the best use of surplus as to equalise the pension promises so that all get the same quality of pension in terms of promise. If all pensions were to level up to the full inflation linking of the public sector, then many pension promises would double and the impact on sponsoring employers might be existential – they’d simply not be able to pay.
If some form of dumbing down to an equal level of pension was granted all, then those giving up pension would not stand for it.
If all pensions were paid without increases then there would be a public outcry.
So we cannot retrospectively change rules, but many schemes offer discretionary increases and some allow these increases to be targeted at certain groups (pre 97 pensioners who have no increases being a special needs group).
Pension schemes that choose to pay one off bonuses out of hardship can do so, though it is a tricky business. Permanent increases where compounding of the initial increase occurs, is very expensive.
Meanwhile there is another group receiving an income for life who have generally opted for no-increase pensions. These are those who have chosen to buy annuities, the vast majority of whom, buy level annuities which have no prospect of shared upside (by way of surplus distribution).
The debate that is being had in the Sunday Mail and the Telegraph before it, is between those who are now feeling the long-term impact of under-indexed pensions because they have been pensioners long-enough to see how long they have fallen behind.
The worry is that there are fresh cohorts of pensioners who may feel that their drawdown policies, their level annuities and their additional investments are good enough to see them through.
The issues for such people, and I could be among them, is that retirement is a long-term business and the calls on cash do not decrease as we grow old (as studies show).
The triple-lock is the gold standard for pension increases and those in public sector schemes have all but gold-plating. For most people, the pension promise at retirement is based on the here and now, they do not have the magnifying glass for the small print and only find out if their pension is silver or chrome plated too late.
We urgently need to work out what can be done by way of prioritisation – for pension scheme surpluses. If surplus extraction occurs, can it be done to the exclusion of pre-97 pensioners who have had no increases for decades? Can schemes use the surplus to buy-out and close the door on discretionary increases? We need to establish who owns these surpluses and here I see the unions and employers having the key roles. I wonder if this will be a political topic over the autumn. It certainly should be a matter for the conferences and for future policy.