Industry experts have raised "major concerns" over plans to provide pre-1997 indexation for Pension Protection Fund (PPF) and the Financial Assistance Scheme (FAS) pension benefits, with some questioning what it could mean for wider discretionary increases. 

During the Budget, Chancellor, Rachel Reeves, announced plans to index for inflation on pensions accrued before 1997 in the PPF and FAS, "so that people whose pension schemes became insolvent through no fault of their own no longer lose out as a result of inflation".

XPS Group head of DC, Sophia Singleton, highlighted the news as a "significant step" towards addressing the previous inequity that has eroded the real value of many members’ benefits over time.

However, Eversheds Sutherland partner and head of pensions, Jeremy Goodwin, argued that "the fact a reform of this nature has been announced without any meaningful consultation with the pensions industry is a major concern".

He also warned that "not only will this impact the PPF’s available reserves/surplus, it could also affect the wider ongoing debate on whether increases on pre-1997 pensions should be provided by defined benefit schemes more generally".

"This is currently a matter for negotiation between trustees and employers, but some MPs are calling for this to be mandated in the current Pension Schemes Bill," he stated. 

"Negotiations between trustees and sponsors of well-funded DB schemes over the use of surplus may also be impacted by the announcement that the government intends to change the tax rules to enable these schemes to pay surplus funds directly to scheme members who are over age 55, where scheme rules and trustees permit, from April 2027.”
 
This was echoed by Aptia chief actuary, Phil Wadsworth, who warned that this measure could put further pressure on trustees of other schemes that similarly aren't protected against inflation.

"Members of large occupational schemes are already lobbying MPs for their benefits to be indexed, and this measure could encourage them to press harder," he stated, suggesting that trustees should prepare for further enquiries by making sure they understand their scheme's position and communicating empathetically with members.’

The implementation details are set to be key, as Barnett Waddingham partner, Ian Mills, said that while the news seems "fair and reasonable", trustees of DB schemes, especially those currently in PPF assessment, will no doubt be keen to learn more about how exactly this will be implemented, and what it will mean for their own schemes.

Some early details have already revealed further information, not all of which is as positive as hoped.

Burges Salmon partner and head of pensions, Richard Knight, pointed out that, "less generous than it might have sounded when the Chancellor was on her feet this afternoon, the detailed budget paper reveals that this will only apply for those members whose original scheme included indexation for pre-1997 benefits". 

Given that there was and is no statutory requirement for increases to be provided on such pre-1997 benefits, Knight warned that there will "still be a significant cohort of members who won’t benefit from [the] announcement".

"And some practical challenges spring to mind around identifying which original schemes did include mandatory increases on pre-1997 accrual, given that, in the case of FAS, the scheme may have entered wind up as much as 28 years ago," he continued. 
 
“The budget paper indicates that the new increases, CPI-based and capped at 2.5 per cent, will come in from January 2027.

"Our working assumption is that this will apply to existing members of the PPF and FAS (given FAS is closed it couldn’t be for new members only), but only on a prospective basis – there is no indication in the papers that any uplift will be given to current PPF and FAS pensioners for previous years of retirement, to compensate them for the value that has already been eroded from their pensions.

There are also broader concerns over what it could mean for the PPF levy, as Pensions UK executive director of policy and advocacy, Zoe Alexander, said that while the PPF is "unquestionably well-capitalised and we’re reassured the PPF has said it can fund the move", the cost of this policy change mustn't be applied to DB pension schemes via the PPF levy, should the funding position of the PPF deteriorate in the future.

Singleton also suggested that, in light of the PPF's £14bn "surplus", linking these changes to a broader review of the PPF's reserves seems the "logical next step and likely now be sought by current levy payers".

---