Can you offer any clarity as to why retirees like me have apparently been left in poverty? (File Image)
I am a 64-year-old retiree whose only source of income is my personal sickness pension from a large financial company.
I retired in 1994 due to injuries sustained while working and took the higher, non-lump sum pension because I thought my pension would increase with inflation, and for a while it did.
I was disappointed that the company changed the increases from the RPI to the CPI as soon as the government made the change to the state pension and since then the purchasing power of my pension has steadily decreased.
In the past and before the switch to CPI, we used to receive periodic discretionary increases, but none have been paid out in recent years.
I have questions about why we retirees didn’t get a fair raise this year (we got 2.5 percent) when even the government followed through on its triple lock commitment and gave 10 percent to state retirees.
1. Should we retirees be concerned that our pensions are being mismanaged by a company that has invested billions and claims to be one of the best pension providers in the UK? Are you struggling financially and just can’t fairly pay your retired staff?
2. Shouldn’t companies that cut our increases to the lowest CPI indexation, fairest for them, be required to follow the government’s triple lock system?
3 Finally, I would like to know if there is any mechanism in the latest pension reforms that allows me to withdraw my pension fund and invest it elsewhere, since it seems that I could get a better offer elsewhere.
My concern is mainly because I still have more than a year to wait to receive my state pension and I was in financial difficulties before inflation rates skyrocketed. With record inflation and these paltry pension increases, I will face the fight until my state pension kicks in.
Can you offer any clarity as to why retirees like me have apparently been left in poverty?
SCROLL DOWN TO FIND OUT HOW TO ASK STEVE HIS PENSION QUESTION
Steve Webb responds: I’m sorry to hear you’ve been struggling as a result of the rising cost of living combined with below-inflation increases in your pension.
I will try to explain why your pension plan has acted as it has, and to reassure you that this is not a sign that your (former) employer is in financial difficulty.
As you know, the pension you currently receive is what is called a ‘defined benefit’ or salary-related pension.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
These high-quality pensions were mostly available to those working for larger companies and could be considered a “perk” in some ways similar to offering a subsidized company car or coffee shop.
The crucial point is that companies were under no obligation to offer such pensions. This means that, with one important exception, there is a limit to the extent to which the government can now force employers to make these freely offered schemes more generous.
The main exception to this is where company pensions are provided on an ‘external contract’ basis, ie to replace part of the state pension that the worker would otherwise have accrued. In this case, the government can impose certain rules about the quality of the defined benefit pension you receive.
To give an example, starting in 1978, workers who did not have a company pension began to accumulate an additional state pension under the SERPS scheme.
But where an employer (such as yours) already provided a defined benefit pension, this could have resulted in a ‘double provision’: accumulating a SERPS pension and a company pension.
To prevent this, company pension plans were allowed to be outsourced outside of the SERPS. This allowed the company (and you as an employee) to pay a reduced rate of NI contributions. In return, the defined benefit pension had to match the SERPS pension that he would otherwise have accrued.
However, the requirements of outsourced schemes to give you inflation protection in retirement were initially very limited.
In simple terms, from 1978 to 1988 there was no obligation to provide inflation increases, while from 1988 to 1997 they had to provide inflation protection of up to 3 percent.
Only for service after 1997 do they have to provide inflation protection of up to 5 percent (reduced in 2005 to 2.5 percent).
If you stopped working in 1995, some of your service is likely covered by the 3 percent rule on service after 1988, but any period before that date may not have statutory increases attached to it.
The point of all this is that the legal requirements on pension plans to increase your retirement pension in line with inflation are complex and limited. This means that, particularly at times of high inflation, defined benefit members may see an increase below the inflation rate.
Fundamentally, the pension plan will have been funded over a period of decades based on these rules.
It would be quite unfair for the employer to suddenly say that because of the government’s policy on the basic state pension, the company’s pension plan suddenly had to pay everyone an extra 10 percent for the rest of their retirement.
Pension plans may, if they choose, pay increases above the level required by plan rules and above the level required by law for subcontracting.
These are called ‘discretionary’ increases. But, as the name suggests, they are not required to do so, and each scheme will have its own rules on how and when to do it.
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If a scheme refuses to pay discretionary increases, it does not mean that the sponsoring employer is in financial difficulty.
It may mean, for example, that the company feels that defined benefit members have had a very high-quality pension provision (of which they have paid only a minority of the cost) and that they would rather spend that money on the younger generation of current employees or investing in the business.
As to your point about switching from the RPI inflation measure to the CPI measure, it is true that CPI inflation is generally lower than RPI inflation and this will have saved the schemes money.
On the other hand, pension plans have to pay pensions on average for much longer than they expected in the past.
So there’s a combination of factors at play, some of which make the position of pension plans better and some of which make the position of pension plans worse, so you can’t just pick one and say that because of that change isolated should get a higher boost.
Finally, because your defined benefit pension is now in pay, there is no mechanism to convert it back into a pension fund that you could later roll over.
If you have not yet started collecting your pension, there would normally be the option of a transfer.
But it would be fair to say that regulators believe that for most people staying in the world of defined benefits with the higher level of certainty it offers is a better bet than rolling the value of their pension into a defined contribution (“cash pool”). money’) world and taking all the risk on yourself.
If you are interested in reading more about the rules around pension inflation increases, including the change from RPI to CPI, the House of Commons Library has produced a useful briefing note which you can find here: Occupational pension increases (parliament.uk).
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is Uncle Agony from This Is Money.
He’s ready to answer your questions, whether you’re still saving, in the process of leaving work, or juggling your finances in retirement.
Steve left the Department for Work and Pensions after the May 2015 election. He is now a partner at the actuary and consultancy firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at firstname.lastname@example.org.
Steve will do his best to respond to your message in a future column, but he won’t be able to reply to everyone or correspond privately with readers. Nothing in his responses constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.
Include a daytime contact number with your message; it will be kept confidential and will not be used for marketing purposes.
If Steve can’t answer your question, you can also contact MoneyHelper, a government-backed organization that provides free pension assistance to the public. can be found here and his number is 0800 011 3797.
SteveWe get a lot of questions about state pension provisions and COPE, the outsourced pension equivalent. If you write to Steve about this topic, here he answers a typical reader’s question about COPE and state pension.
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