Source · Select Committees · Work and Pensions Committee
Recommendation 9
9
Accepted
Paragraph: 83
Undertake research on pension schemes' discretionary increases for pre-1997 benefits and reasons for non-payment.
Conclusion
Some pension scheme members are dependent on discretionary increases to ensure their pension payments keep up with the cost of living. Where these have not been awarded the effect has been, over time, to erode their standard of living. This can be particularly the case for those with rights built up before April 1997, when there was no general requirement to index-link pensions in payment. TPR should undertake research to find out: how many schemes have provision for discretionary increases on pre-1997 benefits within their rules; whether the discretion is for the trustee, sponsoring employer or both; the number of years in which they have paid discretionary increases on pre-1997 rights; and in the years they have not done so, the reasons for this.
Government Response Summary
TPR has already undertaken the recommended research on discretionary increases for pre-1997 benefits through its Defined Benefit 2024 survey, with specific findings published on March 25, 2025. The research provides data on schemes allowing and providing these benefits, as requested.
Paragraph Reference:
83
Government Response
Accepted
HM Government
Accepted
The Government takes the concerns raised very seriously. Members of these pension schemes are now understandably concerned at seeing inflation erode the value of their retirement income. Pension scheme trustees and sponsoring employers need to think carefully about the impact inflation has on members’ benefits when they are making decisions about benefit increases. TPR has undertaken research on the provision of discretionary benefits via their Defined Benefit 2024 survey, which is conducted with a representative sample of 200 occupational pension schemes. TPR conducted this survey last autumn and the findings were published on 25 March 2025.10 The findings showed the following: • 67 per cent of schemes allowed in their scheme rules for the provision of discretionary benefits to their members. This ranged from 83 per cent of large schemes, to 53 per cent of micro/ small schemes. • Of those that allowed for the provision of discretionary benefits, 32 per cent had provided these benefits to members in the previous three years. • Where discretionary benefits had been provided, 15 per cent were for pre-1997 accrual. • The size of the scheme did not appear to correlate with the likelihood of discretionary pre-1997 benefits being paid: 15 per cent of large, 18 per cent of medium, and 11 per cent of micro/small sized schemes had provided discretionary pre-1997 benefits. • Where discretionary benefits are allowed under the scheme rules, 72 per cent of schemes required the consent of both the trustees and the employer. • The requirement for consent of both the trustees and the employer was more likely among larger schemes (92 per cent) than smaller schemes. In summary, this research shows that two-thirds of schemes allow for the provision of discretionary indexation and that in the majority of cases the trustees and the employer have to agree to pay these benefits. The Department plans to work with TPR to understand the reasons why schemes are not making discretionary pre-1997 payments and monitor trends. The Government’s recently announced reforms on the use of surpluses in defined benefit schemes will make it easier for individual schemes to make decisions that improved outcomes for both sponsoring employers and members, which could include discretionary benefit increases. Pension trustees and employers will have more flexibility to unlock this money to invest in the business and unlock more money for pension scheme members. TPR’s guidance already requires trustees to consider the situation of those members who would benefit from a discretionary 10 https://www.thepensionsregulator.gov.uk/-/media/thepensionsregulator/files/import/ pdf/defined-benefit-schemes-survey-research-report-2024.ashx increase and whether the scheme has a history of making such awards. Following our reforms, trustees will continue to consider the correct balance of interests between members and the sponsoring employer when making decisions about surplus funds. Trustees will be responsible for determining how members may benefit from any release of surplus and have a suite of options to choose from–for example, through discretionary benefit increases.