Inflation-linked increases to hit DB pensions?

Aon has said in a Press Release that UK defined benefit (DB) pension schemes may be facing difficult decisions later this year around whether to grant inflation-driven discretionary increases. If inflation remains at current levels, these increases could add £8bn to liabilities across private sector DB schemes. The majority of pension schemes have increases with caps, with many capped at 5% per annum. However, if inflation, measured by both the Retail Prices Index and the Consumer Prices Index, is above 5% in the key reference month of September, schemes will have to decide whether or not to provide increases above the cap.

Lynda Whitney, Partner at Aon, said: 

“A potentially tricky situation is looming and schemes need to be clear from a governance perspective on where the decision sits. Is the discretionary increase power with the trustees, the sponsor or a combination of the two? Even if either party has unilateral power, reaching a consensus will often be desirable. It’s possible that some schemes could justify that they have been receiving significant deficit contributions to meet the guaranteed benefits and do not see the current scenario as a reason to provide a benefit improvement.”

Where defined benefit pension holders don’t receive a benefit improvement, some may look to transfer out of the scheme. Anyone wishing to transfer a fund value of £30,000 or more will need to take financial advice to ensure they fully understand both the benefits and risks of transferring their pension. Opting to transfer a defined benefit pension to a defined contribution pension is unlikely to be in most people’s best interests and it is not a decision to be taken lightly. 

This is a complex area of financial planning and our suitably qualified, unbiased and regulated financial advisers can provide clarity and help answer some of the complicated questions. As a firm we adhere to the Pension Transfer Gold Standard and have several accredited pension transfer specialists.

Get in touch with a TPO adviser.

The information in this article is correct as of 23/06/2022.