The Society of Pension Professionals (SPP) has warned against across-the-board legislative changes requiring schemes to pay pre-1997 increases retroactively, arguing that this is a scheme-specific issue that should remain subject to negotiation. 

Currently, defined benefit (DB) pension scheme members who accrued pension benefits before April 1997 do not have a statutory right to inflation-linked increases on that part of their pension, and whilst many scheme rules require such increases to be paid, a significant minority do not. 

Issues around discretionary DB increases have come under renewed focus in recent months, particularly given the recent progress made by the Pension Schemes Bill, which includes new flexibilities relating to the use of pension scheme surpluses.

The SPP's report acknowledged that some have argued there is a moral obligation to provide inflation-linked increases on pensions earned pre-1997, in the context of a substantial erosion of value in real terms for many members.

However, it warned that there are issues with a blanket legislative change, explaining that many sponsors would argue that this cost would be unfair in the context of them having borne the risks associated with their DB schemes and having paid benefits in line with legal requirements.

Additionally, many sponsors can make a strong claim for a refund from the surpluses in their schemes, having paid large sums in deficit contributions into the arrangement over recent decades. 

Another key issue highlighted by the SPP is intergenerational fairness and the looming pensions adequacy crisis for the defined contribution (DC) generation, as the group admitted that some might question whether going back to further protect historical benefits for DB members is fair.

There is also a risk associated with imposing retroactive burdens on historic promises in terms of employers committing to appropriate long-term savings vehicles.

Indeed, the SPP suggested that this is particularly important to consider in the context of the nascent collective defined contribution (CDC) regime, which relies on predictable costs for sponsors, facilitated by schemes having flexibility to reduce pension increases, and in the extreme, reduce pensions, in the event of negative experience.

Whilst the SPP acknowledged that some might argue that this issue could be addressed by only imposing the liability on schemes that have a surplus, it argued that even this has issues and there are plenty of potential complexities.

Given this, the SPP argued that while the sentiment to support long-serving pensioners is strong, the complexity and variability of individual scheme circumstances make taking a scheme-specific approach more appropriate than universal legislative solutions.

"The issues surrounding pre-1997 DB indexation are multifaceted, and solutions are unlikely to be uniform," it stated.

"A balanced, scheme-specific approach appears to offer the most sustainable path forward, recognising the differences in stakeholder needs, scheme finances, and legal structures.

"Maintaining flexibility, enhancing trustee guidance, and focusing on member outcomes—without imposing blanket obligations on schemes and their sponsors — will be critical to preserving trust and sustainability in the UK pension system and avoiding unintended consequences."

However, the SPP said that there are changes that could be made to improve the current situation, in addition to the upcoming legislation changes around surplus release, which it said would be a "positive influence".

In particular, the SPP said that the biggest change in this area could be achieved by allowing schemes to make lump sum payments to scheme members rather than restricting any discretionary benefits to being pension increases.

Whilst not currently possible, as such payments would be treated as unauthorised under the current tax regime, the SPP suggested that changes in this area could prove valuable for members, trustees and sponsors alike.

Indeed, the SPP argued that trustees should find it easier to weigh up how to spend any discretionary fund equitably across their membership and not just a (small) minority, while sponsors may also be more likely to agree to such changes.

In addition to this, the SPP suggested that, depending on the tax charge applied to such payments, this could also increase the quantum of income tax collected by the government in the short term.

More broadly, the SPP also encouraged policymakers to instead focus on the adequacy of pension provision for future generations as well as legislative change to permit one-off discretionary payments to members instead of requiring longer-term commitments.

SPP DB Committee chair, Jon Forsyth, said: "Taking all of the relevant viewpoints and factors into consideration, the SPP believes that trustees and sponsors continue to be best placed to assess affordability, risk, and fairness for their individual scheme circumstances, rather than having an overriding government solution imposed upon them.  
"In our view, policymakers should instead continue to focus on the adequacy of pension provision for future generations, and should also strongly consider legislative change to permit one-off lump sum discretionary payments to DB scheme members.” 
 
The SPP's paper also considered the issues being faced by the Pension Protection Fund (PPF), which is increasingly being pressured to consider pre-1997 indexation for the 172,000 members of the PPF with accrued pensionable service prior to 6 April 1997.

While the SPP agreed that this is something that should be considered, it warned that any changes should only be undertaken after having considered all the available factors and the likely impact, both intended and unintended.

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