One of the key elements of the Government’s response to the Deregulatory Review is a proposal to cap revaluation of preserved pension benefits, accrued after a certain date, to RPI up to 2.5% p.a. Benefits already accrued will be unaffected by these proposals.
Having conducted an initial impact assessment, the Government noted that ‘a reduction in the cap on revaluation would have very little effect on average private sector incomes from defined benefit schemes’. It argues that reducing the cap to 2.5%, from 5.0%, would encourage more employers to maintain defined benefit schemes where they may be considering other alternatives.
The Government’s response also adds that the potential reduction to benefits would not impact heavily on the State by way of pensioners having to fall back on other state benefits. A key factor is HM Treasury’s forecast for long term inflation of 2.9%.
Mike Jones of pension education website, MyCompanyPension.co.uk says, “Since revaluation was introduced for the whole of non-GMP benefits accrued after 31st December 1990, 12 out of 16 years have seen RPI at higher than 2.5%. A preserved pension of £10,000 p.a. would have revalued to £15,501 p.a. If RPI had have been capped at 2.5% during the same period, the corresponding revalued pension would be £14,218 p.a. Is £1,300 p.a. negligible? – I don’t think so.”
In looking to save, if not revive, the defined benefit marketplace, the report acknowledges the complex and difficult issues in balancing employers needs against scheme members confidence in pensions.
Jones adds, “Many sponsoring employers feel battered and bruised by years of Government meddling in pension provision as it tried to protect members’ benefits. Setting a cap at 2.5% just because it fits in well with existing legislation for increases given to pensions in payment sits uneasy when the Treasury is forecasting higher long term inflation. As it stands, this is a retrograde step and scheme members need to be alerted so that they can at least voice their opinion in the consultation process.”
What remains unclear, is whether the change proposed to revaluation will affect public sector pensions?
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