Up to 260,000 pensioners whose former employers have gone bankrupt are about to take a second big hit to their income that will cost them thousands of pounds because their pensions are not linked to inflation.
When an employer goes under, a lifeline called the Pension Protection Fund (PPF) acts as a safeguard for savers in final salary or defined benefit plans by guaranteeing payment of their pensions.
These types of pensions pay a guaranteed income during retirement, which typically increases with inflation.
But an overlooked part of the PPF rules means that more than a quarter million people in the fund have no protection against rising prices.
One pensioner, Mike Wilding, 78, told us he has to keep working to top up his pension, which increases by just £100 a year, despite originally retiring on his 65th birthday. You can read his story below.
Some retirees are missing out on over £5,100 in pension increases this year and next
Inflation has been staggeringly high for two years, resulting in two consecutive shocks to your purchasing power.
Last year, inflation would have eroded its revenue by 10.1 percent, and this year’s inflation compounds that loss by a further seven percent.
In some cases seen by us, retirees are being denied more than £5,100 in pension increases in total this year and next.
This is because the amount their pensions increase each April is capped at 2.5 percent or frozen entirely, leaving their income well below the price increases.
As inflation remains high, they face a second year in a row of their pensions losing thousands of pounds in purchasing power.
The PPF told The Mail on Sunday and This is Money that raising the cap for inflation to 2.5 per cent would cost the scheme £4.3 billion, while a 5 per cent cap would increase its liabilities by £ 7.7 billion.
A spokesman says: “We have provided the government with our assessment of linking pre-1997 compensation to inflation.”
Campaigners have branded the oversight “age discrimination” as it will most likely affect many retired Britons now in their 70s and 80s.
The Private Pensioners Association (DPA) campaign group has calculated that 60,000 people do not receive any increase from inflation, meaning their pension income is permanently frozen.
Another 80,000 retirees receive only partial increases. This is because contributions made to a pension before 1997 do not receive inflation protection under the PPF scheme. All contributions made after this date generate an annual increase of 2.5 percent according to the rules.
However, this is only half of what they could have received if their employer hadn’t gone under. Many private sector defined benefit pensions peg payments to inflation, capped at 5 percent.
The Bank of England does not expect inflation to fall back to its two percent target until early 2025.
No choice: Mike Wilding still works at 78 to top up his pension
Still working at 78 after my pension fund collapsed
Among those affected is Mike Wilding, 78, of Cirencester, Gloucestershire, who has had no choice but to continue working to top up his pension, despite originally retiring on his 65th birthday.
His pension, which is part of the PPF, is increasing by just £100 a year, meaning his purchasing power is eroding fast.
If your pension had been fully inflation protected, you would have received an increase of £2,929 in April this year and a further increase of £2,235 in April 2024.
Mowlem, the construction company he worked for, was bought by Carillion in 2006 and the pension he had been paying since 1966 closed three years later, shortly before he retired.
Mike receives an income of £29,000 from the PPF each year for his 43 years of pension contributions. However, 30 of those years came before the 1997 PPF cutoff, which means that only a small proportion of his pension is indexed.
“I’ll be 79 in October and I’m still working several days a week just to keep my annual pension income at the level it would be if it had been linked to inflation.”
Mike, who works as a construction consultant, fears that he will have to continue until he is 80 years old and worries about the value of the pension that he will be able to leave to his younger wife.
Should the PPF make a one-time cost-of-living payment?
Ros Altmann, a former pensions minister, says the rule is a “big disappointment” and is urging the PPF to make a one-time cost-of-living payment to those under its umbrella to help them through the crisis. “That would help make it more affordable and palatable.”
He adds that the erosion of the value of the promised pension is more serious than expected because inflation was not expected to skyrocket.
In addition to those in the PPF, it is believed that 120,000 pensioners whose company pensions failed before the creation of the PPF are also suffering from an indexation loss. Your payments are administered by the predecessor of the PPF, the Financial Assistance Scheme.
Now the DPA has called for a review of the law, urging the government to correct a historic mistake. Founder Roger Sainsbury says: ‘There are 260,000 people who experience age discrimination. It is unfair, unfair and causes great hardship in these times of high inflation.’
The workers who helped create the fund also lose
Others affected by the pre-1997 clause include about 1,000 former workers at Allied Steel and Wire, which went bankrupt in 2002. It was their campaigns that helped create the pension protection plans, but nearly all of them had set aside for retirement. it has disappeared. No inflation protection.
Terry Monk, of the activist Pensions Action Group, says that people in their 70s are likely to have their entire pension frozen. ‘They’re down to 50 per cent of what they would have expected, and with current inflation rates, very soon they’ll be getting less than half of what they should have been getting. When you don’t have a big pension, it’s very unfair.
If a company goes into bankruptcy and someone over the company’s retirement age falls under the protection of the PPF, then they will receive 100 percent of the pension in payment.
However, if the member is below retirement age or took early retirement, they will receive 90 percent of what they were promised.
A PPF spokesperson says: ‘We are very aware and sensitive to the impact of inflation on our members. The way in which the PPF compensation is increased is established in the legislation.’ He added that any changes would make the PPF less financially resilient.
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