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 DB schemes that are household names because of the lack of statutory inflation protection for pre-1997 service.
Whilst 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 BP and Hewlett Packard updated the Work and Pensions Select Committee about the impact this has had on former employees. TPR were 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. The lobbying group has expanded and now covers another 9 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 with the same length of service but commencing in 1997 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.
Whilst some trustees will take the view that ‘we’ve 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.
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