An impending battle royal looms over the £1.4tn defined benefit pension sector, now with an almost unimaginable surplus of more than £400bn.
Advisers, your clients need you. Bat for them to make sure they get their dues in any division of the spoils before they are hoovered up in buyouts and gone to members and employers forever.
A not insignificant 10mn people are members of DB schemes and 1mn are still accruing rights. Among them, many of your clients looking forward to receiving their annual index-linked pension increases in April.
Some pre-1997 pensions have no indexation and get nothing while others’ increases are capped at 3 per cent or 5 per cent. Meanwhile inflation is eating away at retirement income, especially of the very elderly.
But inflation, although tamed from its heights, is not back in its cage; in the UK it reached a 41-year-high of 11.1 per cent in October 2022. Today, Britain’s annual rate of inflation has remained stubbornly high at 4 per cent for a second month in a row, and the Bank of England has warned that this fall could be temporary, with inflation on the march later in the year.
Yet, for some, particularly the very old, with no inflation protection at all, the loss of such benefits could put them on the breadline. If the inflation rate averages 5 per cent per a year over five years, the reduction in their purchasing power is 22 per cent.
Tom Selby, head of policy at AJ Bell, explains the impact: “If we had 5 per cent inflation for five years, a £10,000 pension income without inflation protection would be worth £7,738. If we had 5 per cent inflation for 10 years, it would be worth just £5,987."
Most scheme rules permit trustees to make discretionary awards in inflationary periods but many are too timid to do so or have little experience in this area as this issue has not been on their agenda for nearly three decades.
Few pensioners know about these discretionary benefits. Fewer still of their advisers are taking up the cudgels on their behalf to write letters to the trustees.
Some pensioners really need every penny of the extra money – they may have assets but not income. They are not all the rich lazy baby boomers so often ridiculed on social media.
If their pension is not increased, they will have to fall back on state benefits.
Research for consultancy Broadstone shows many pensioners lose out: “For benefits accrued before 1997, 31 per cent of schemes have capped inflationary increases and a similar proportion (32 per cent) have fixed increases. One in five schemes (21 per cent) do not have any indexation on these scheme benefits."
Only one in 10 schemes offer uncapped increases that keep member payments in line with inflation, and the vast majority of schemes will provide uplifts below the 6.7 per cent consumer price index figure for the year to September 2023.
