Legislation requires some pensions in payment (usually contracted-out benefits and benefits accrued after 6 April 1997) to be increased in payment, and some scheme rules also provide for increases on benefits earned before 6 April 1997. However, it is also relatively common for schemes to contain a power to provide additional (discretionary) pension increases. Often these provisions are only exercisable with the consent of the employer.
Whilst inflation has historically been low, discretionary pension increase rules have sometimes been overlooked. With inflation now considerably higher (the Office for National Statistics reported a rise in CPI of 9.1% in the 12 months to May 2022), and many increases being capped at 5% or lower, scheme members may start asking questions about whether the trustees or employer have a power to grant additional increases.
We recommend trustees to review their rules and check if there is a discretionary increase provision. If so, it would then be sensible to consider (and discuss with the employer) whether or not discretionary increases should be provided. It may well be that the funding position of the scheme means discretionary increases are not appropriate (or the employer may – perfectly legitimately – refuse to consent to any increases). However, it is important that trustees and the employer think about what the rules say, and consider (and document) any decision about whether or not to grant discretionary increases. Demonstrating that an issue has been considered properly is the best way to deal with any member queries/claims in future.
Authored by the Pensions Team.
UK Pensions newsletter - July 2022
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