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Increases to pensions in payment - what you need to know
As you will probably already know the Pensions Act 2004 introduced changes to the way in which pensions in payment are increased. These changes came into effect from 6 April 2005.
Why were these changes made?
The reasons behind the changes were:
- to lessen the burden on employers with defined benefit (DB) schemes. As a result of the introduction of the Pension Protection Fund a further levy is payable. The reduction of the LPI requirement is partly designed to offset the increased cost to the employer, and
- give members of occupational defined contribution (DC OPS) and personal pension (PP) schemes more choice and flexibility when they purchase an annuity.
What were the changes?
To illustrate the changes we’ve shown the position both pre and post 6 April 2005 split between DB, DC OPS and PP schemes.
DB schemes – pensions coming into payment prior to 6 April 2005
| Benefit portion | Increases required |
|---|---|
| Non-GMP* pre 6.4.97 | None |
| GMP (pre 6.4.88) | None |
| GMP (6.4.88 to 5.4.97) | Lesser of RPI** and 3% p.a. |
| Post 5.4.97 | Lesser of RPI and 5% p.a. |
*GMP – guaranteed minimum pension
** RPI – retail prices index
DB schemes – pensions coming into payment from 6 April 2005
| Benefit portion | Increases required |
|---|---|
| Non-GMP pre 6.4.97 | None |
| GMP (pre 6.4.88) | None |
| GMP (6.4.88 to 5.4.97) | Lesser of RPI and 3% p.a. |
| Post 5.4.97 to 5.4.05 | Lesser of RPI and 5% p.a. |
| Post 5.4.05 | Lesser of RPI and 2.5% p.a. |
DC occupational schemes – pensions coming into payment prior to 6 April 2005
| Benefit portion | Increases required |
|---|---|
| Non-protected rights pre 6.4.97and AVCs | None |
| Protected rights pre 6.4.97 | Lesser of RPI and 3% p.a. |
| Post 5.4.97 - all benefits but not AVCs | Lesser of RPI and 5% p.a. |
DC occupational schemes - pensions coming into payment from 6 April 2005
| Increases required |
|---|
| No increases are required on any portion of the benefit |
PP - pensions coming into payment prior to 6 April 2005
| Benefit portion | Increases required |
|---|---|
| Non-protected rights | None |
| Protected rights pre 6.4.97 | Lesser of RPI and 3% p.a. |
| Protected rights post 5.4.97 | Lesser of RPI and 5% p.a. |
PP - pensions coming into payment from 6 April 2005
| Increases required |
|---|
| No increases are required on any portion of the benefit |
It’s worth pointing out the new requirements for PPs, DC OPSs and protected rights benefits are not retrospective. If a pension came into payment prior to 5 April 2005, the increases which applied when payments started will continue to apply for the lifetime of the pension.
Hybrid Schemes
Any defined benefits should be treated as if they were from a defined benefits scheme.
Any money purchase benefits should be treated as if they were from a defined contribution scheme.
Increases required when a transfer value has been paid on or after 6 April 2005 for a member and pension comes into payment from 6 April 2005
| Type of transfer | Increases required |
|---|---|
| Transfer to DB | Pre 6.4.97 – None |
| Transfer to DC OPS or PP* | Pre 6.4.97 - None |
Effect on scheme rules
- The legislation only provides the absolute minimum increases required - scheme rules may permit higher increases to pensions in payment.
- The legislation applies if the scheme rules do not provide the minimum increase required i.e. legislation overrides the scheme rules.
- If the scheme rules provide increases required greater than the legislation, the scheme rules will apply.
Information requirements
Prior to 6 April 2005, the increases required were in place to make pensions inflation proof and offer members some protection for the future. As this protection has now been lost, the trustees must provide information that will help members understand the new choices they can make.
All trustees of occupational money purchase pension schemes must provide information about the different types of annuities available to members who are close to retirement and who have a say in what type of annuity they want to buy. The Pensions Regulator has produced a booklet for occupational money-purchase pension schemes that contains all the relevant information.
The information provided must advise the member that:
- they can select the type of annuity they want
- they can select the annuity provider
- different annuities have different features and can be paid at different rates
- the annuity can be level or increasing
- the annuity may be single life only, or joint life
- the annuity may or may not provide a guarantee on early death of the member, and
- that they should consider taking independent financial advice to make sure the annuity is the most suitable to their own circumstances.
Personal pensions are regulated by the FSA and they have produced a leaflet for personal pension schemes. A link to this information can be found under the related links section of this page.
This information is based on our understanding of the amendments introduced with the Pensions Act 2004:
Sections 51 and 162 PA95 (as amended by PA 04 and The Personal and Occupational Pension Schemes (Indexation and Disclosure of Information) Regulations 2005 (S.I. 2005/704),
Section 109 of the Pension Schemes Act 1993
Regulation 4 of the Personal and Occupational Pension Schemes (Protected Rights) Regulations 1996 (S.I. 1996/1537) as amended by The Personal and Occupational Pension Schemes (Indexation and Disclosure of Information) Regulations 2005 (S.I. 2005/704)
Regulation 2 of the Occupational Pension Schemes (Indexation) Regulations 1996 (S.I. 1996/1679) as amended by The Personal and Occupational Pension Schemes (Indexation and Disclosure of Information) Regulations 2005 (S.I. 2005/704)
Paragraph 7 of Schedule 2 to the Occupational Pension Schemes (Disclosure of Information) Regulations 1996 as amended by The Personal and Occupational Pension Schemes (Indexation and Disclosure of Information) Regulations 2005 (S.I. 2005/704)
Published 27 May 2005
Updated 11 April 2007
