From: Ministerial Correspondence, Caxton House, Tothill Street, LONDON SW1H 9DA www.dwp.gov.uk ministers@dwp.gov.uk Our Ref: TO2024/12322
19 February 2024
Dear Ms Dean,
Thank you for your email of 9 February to the Minister for Pensions about the Reuters Pension Scheme. Government Ministers receive a large volume of correspondence and they are unable to reply personally on every occasion. I have been asked to respond.
You will understand that neither Ministers nor their officials can comment on an individual case or scheme, however, it might help if I explain why there can be differences in the treatment of benefits earned before and after 1997 and between schemes.
Before April 1997, there was no statutory requirement on defined benefit schemes to increase pensions once in payment, apart from any Guaranteed Minimum Pension element (paid in place of the additional State Pension) earned between April 1988 and April 1997 which must be increased by inflation capped at 3 per cent.
As part of the Pensions Act 1995, the Government introduced a new provision requiring indexation on all defined benefit pension rights earned from April 1997 onwards to protect pensioners against the effects of inflation. This legislation did not require schemes to pay indexation on benefits earned prior to 1997. Changes to pensions are not normally backdated (in the sense of applying to existing pension rights), but only apply to benefits that are built up following the change. The reason for this is that it is generally seen to be unreasonable to add liabilities to pension schemes that could not possibly have been considered in the funding assumptions that determined the contributions to be paid at the time.
This remains the case today, if the Government changed the law to require schemes to now pay indexation on pre-1997 accruals, this would be a retrospective change. The amount of additional liabilities that would be added could be very significant. In some cases, the additional requirement may be a significant burden to the employer, putting its business operations, and ultimately the pension scheme, at risk.
However, there is nothing that prevents schemes from making more generous arrangements through the scheme rules. If the scheme rules provide for increases on pensions in payment earned before April 1997, those increases must continue to be paid.
Individual scheme rules may provide for discretionary increases above the statutory minimum. Whether or not discretionary increases are paid is a matter for the scheme trustees and the sponsoring employer. The Government has no power to intervene to require a scheme to pay an annual increase above that required by the statutory indexation requirements and/or scheme rules.
The Government keeps all legislation under review. However, there are currently no plans to change the legislation relating to pre 1997 indexation.
Finally, arrangements to provide pension benefits to some or all scheme members with an insurer, known as an insurance ‘buy in’ or an insurance ‘buy out’, are very secure and offer long term protection for member benefits.
This is a common and standard approach used by schemes to secure the promised pension for members. It is generally very much welcomed by trustees, as it results in a secure way of ensuring that members get the pensions that they have been promised for the rest of their lives. It is generally regarded as the gold standard for security for pension benefits.
I hope this helps to explain the position.
Yours sincerely,
Naomi Agius
Acting Head of the Ministerial Correspondence Team