www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | papers@parliament.uk | @commonslibrary

BRIEFING PAPER

Number CBP-05656, 8 December 2017

Occupational pension increases

By Djuna Thurley

Contents: 1. Introduction 2. Development of policy 3. British Steel Pension Scheme 4. Revaluation of deferred

pension rights

2 Occupational pension increases

Contents Summary 3

1. Introduction 6

2. Development of policy 7 2.1 Limited price indexation (LPI) 7 2.2 Reduction in the cap 8 2.3 Deregulatory review 9 2.4 Switch to the CPI 10 2.5 Responses 11

Impact 12 2.6 Westminster Hall debate – the impact on pensioners 14 2.7 February 2017 DB Green Paper 15

3. British Steel Pension Scheme 19 3.1 Consultation on proposal to allow the scheme to change indexation and

revaluation rules 19 3.2 Regulated Apportionment Arrangement 25 3.3 Options for scheme members 28

4. Revaluation of deferred pension rights 33

Contributing Authors: Djuna Thurley

3 Commons Library Briefing, 8 December 2017

Summary Defined Benefit (DB) pension schemes provide pension benefits based on salary and length of service. There are statutory minimum requirements on them to:

- Index pensions in payment in line with inflation, capped at 5% for benefits accruing from service between April 1997 and April 2005, and at 2.5% for benefits accruing from April 2005 - known as Limited Price Indexation (LPI) (Pensions Act 1995, s51);

- Revalue the deferred pensions of early leavers in line with inflation capped at 5%, and at 2.5% for rights accrued on or after 6 April 2009 (Pension Schemes Act 1993).

Before April 1997 there was no general obligation on Defined Benefit schemes to increase pensions in payment (although there was a requirement on schemes that were contracted out of SERPS to provide indexation capped at 3% on rights accrued from 1988).1

Importantly, these are statutory minimum requirements -there is nothing to prevent schemes from making more generous arrangements through their scheme rules.2 Despite the fact that indexation was not made mandatory for rights accrued before 1997, it appears that many schemes did apply some form of inflation protection to pensions in payment on a voluntary basis and many applied LPI retrospectively to service before 1997 (Deregulatory Review, March 2007)

Development of the rules In 1993, the Pension Law Review Committee, chaired by Professor Roy Goode, recognised the importance of indexation from the individual’s perspective:

Most important is the uncertainty with regard to inflation. The individual is concerned not with money amounts but with what the pension will buy.(Pension Law Reform. The report of the Pension Law Review Committee, para 3.1.10)

Despite this, the Committee did not recommend making LPI retrospective, because it:

[…] recognised that to require all earnings-related schemes to introduce LPI for pension rights accrued before the appointed date would place a considerable burden of costs on such schemes. (Ibid)

The Labour Government legislated to reduce the LPI cap to 2.5% for rights accrued from April 2005 in the Pensions Act 2004 (s278-9). Following a consultation, it had decided that “mandating some level of protection from inflation remains desirable” but that lower inflation levels made a reduction in the cap appropriate:

In 1995, when the legislation introducing LPI was passed, long-term expectations of inflation were significantly higher: the 5 per cent cap was only intended to provide for partial cover against inflation. But the Government’s success in reducing inflation means that mandatory indexation has effectively become full inflation cover, something which is proving disproportionately expensive for some schemes to provide. (Cm 5835, p23).

In December 2006, an independent review looked at whether LPI should be removed. However, the reviewers – representing the employer and union sides - were unable to agree.3 The Labour Government decided not to remove the requirement on the grounds that it was an important protection for members and there was no clear evidence that 1 SN-04956 Guaranteed Minimum Pension – annual increases (2015) 2 HC Deb, 19 July 2010, c4 3 Lewin and Sweeney, Deregulatory Review of Private Pensions. A Consultation Paper, March 2007

4 Occupational pension increases

removing it would have a direct and significant effect on employer provision (Deregulatory Review, March 2007).

From April 2011, the Coalition Government changed the measure of inflation used for determining the annual minimum increases from the Retail Price Index (RPI) to the Consumer Prices Index (CPI) (HC Deb, 8 July 2010, c14-16 WS).The change was controversial because the CPI inflation tends to be lower than RPI inflation. The impact of the legislative change on individual schemes would depend on what their rules said (DWP, Impact assessment, 12 July 2011).

Recent debates In its December 2016 report on Defined Benefit pension schemes, the Work and Pensions Select Committee said schemes that had latitude in their rules to switch to the CPI had tended to do so. It recommended that the Government consult on “permitting trustees to propose changes to scheme indexation rules in the interests of members”:

Pension promises are just that. Any change to the terms of them should not be taken lightly. In circumstances where an adjustment to the scheme rules would make the scheme substantially more sustainable, however, a reduction in benefits could well be in the interests of members.4

In a Westminster Hall debate on 17 January 2017, concerns were raised about the impact of non-indexation of pre-1997 rights on pensioners. MPs called for the Government to address the issue in its forthcoming Green Paper on defined benefit pension schemes. Pensions Minister Richard Harrington said the Government believed that “retrospectively changing the legislative requirements on indexation would be inappropriate and would have a significant impact on the schemes of employers involved.” (HC Deb 17 January 2017 c270-284 see also Library debate pack CDP-2017-0016).

In its February 2017 Green Paper, the Government asked for views on whether:

- There was evidence to suggest an affordability crisis that would warrant permitting schemes to reduce indexation to the statutory minimum;

- The Government should consider a statutory over-ride to allow schemes to move to a different index, provided protection against inflation was maintained;

- The Government should consider allowing schemes to suspend indexation in some circumstances. (DWP, Security and Sustainability in Defined Benefit Pension Schemes, CM 9412, Feb 2017).

British Steel Pension Scheme In May 2016, the current Government launched a public consultation on the British Steel Pension Scheme (BSPS), which included a proposal to allow the scheme to reduce indexation and revaluation on future payment of accrued pension rights. To do this, they would need to change the ‘subsisting rights provisions’ which prevent unilateral changes to members benefits in a way that is detrimental to members’ rights in the scheme (Pensions Act 1995, s67). The scheme trustees argue that the proposals are in the best interests of the Scheme membership. However, some commentators expressed concern at the wider implications of undermining the principle that pension promises, once made, cannot be changed retrospectively.

On 16 May 2017, the Pensions Regulator (TPR) reported that the key commercial terms of a Regulated Apportionment Arrangement had been agreed in respect of the BSPS. It

4 Ibid, para 110-11

5 Commons Library Briefing, 8 December 2017

would continue to work with Tata Steel UK and the trustee “in respect of the proposal to offer members an option to transfer to a new scheme sponsored by TSUK, which may occur should the approval to the RAA be granted, or stay in the BSPS and receive PPF compensation” (TPR, Statement on British Steel Pension Scheme, 16 May 2017).

On 11 August 2017, TPR said it had given initial approval to a proposal from Tata Steel UK to restructure the BSPS:

This restructuring will be done through a regulated apportionment arrangement (RAA). The BSPS will receive £550 million from the Tata Steel Group, significantly more than it would receive in insolvency, and a 33% equity stake in TSUK.

Following completion of the RAA, the scheme will offer members the choice to either transfer to a new scheme (if it meets certain qualifying conditions) which will be sponsored by TSUK, or remain in the existing scheme which will transfer to the PPF. (PN17-48, 11 August 2017)

The deal received formal approval from TPR on 11 September 2017. Scheme members have until 22 December to choose between two options:

• to switch to a new scheme (the New BSPS) providing the same benefits as BSPS but with lower future increases; or

• to remain with the current BSPS and move into the Pension Protection Fund (PPF). (British Steel Pension Scheme separated from Tata Steel UK, 11 September 2017)

Information for scheme members is at: www.bspensions.com/choose

Chair of the Work and Pensions Committee Frank Field has written to TPR raising questions about the indexation arrangements in the new scheme.

The Committee is also looking at the advice and information given to members of the BSPS about their pension scheme and transfer options (press release, 30 November 2017).

6 Occupational pension increases

1. Introduction There are two main types of occupational pension schemes:

• Defined Benefit (DB) schemes, that typically promise to pay a pension linked to salary and length of service.

• Defined Contribution (DC) schemes, that typically pay out a sum based on the value of a member’s fund on retirement.

For DB schemes, there are statutory minimum requirements regarding the indexation of pensions in payment and the revaluation of the deferred pension rights of early leavers:

• Under the Pensions Act 1995 pensions in payment must be increased annually in line with prices, capped at 5%, was required for rights accrued from 1997.5 Under the Pensions Act 2004, the cap was reduced to 2.5% for rights accrued from 2005 onwards.6

• Under the Pension Schemes Act 1993l deferred pension rights must be revalued in line with prices, capped at 5% for service to 5 April 2009, and at 2.5% for service thereafter.7

The minimum annual increases are provided for in an annual order.8

Separate requirements applying to Guaranteed Minimum Pensions (which schemes are required to provide as a condition of being used to contract-out of the State Earnings Related Pension Scheme between 1978 and 1997). Occupational pension schemes are required to index-link GMP rights accrued between 1988 and 1997 subject to a cap of 3%.9 This, and the interaction of GMPs with the State Pension system which also provides some indexation, is discussed in Library Briefing Paper SN-04956 GMP annual increase order (June 2015)

This legislation does not apply to DC schemes, where inflation-protection will depend on what an individual does with their funds at retirement - for example, whether they buy an index-linked or fixed annuity.10 The requirement to index-link DC scheme pensions or lifetime annuities was removed for pensions coming into payment from April 2005.11

5 Section 51 6 Section 278 7 Pension Schemes Act 1993, Part IV, Chapter II 8 See for example, The Occupational Pension (Revaluation) Order 2015 (SI 2015/1916) 9 Pension Schemes Act 1993, s109 10 HC Deb, 2 March 2011, c478W 11 HL Deb 13 October 2004 c91GC; Pensions Act 2004, s278-9

7 Commons Library Briefing, 8 December 2017

2. Development of policy

2.1 Limited price indexation (LPI) Before April 1997 there was no general obligation on Defined Benefit schemes to increase pensions in payment - although contracted-out occupational pension schemes had to provide a Guaranteed Minimum Pension (GMP) and a required to index GMP rights accrued from 1988 to 1997, subject to a 3% cap.12 A requirement to index-link pensions in payment was legislated for in 1990 but no commencement date was set - apparently because of uncertainty due to legal cases pending in the wake of the Barber judgement relating equal treatment.13

In 1993, the Pension Law Review Committee, chaired by Professor Roy Goode, pointed out that, from the individual’s perspective, it is not just the adequacy of a pension that is important but also the question of how certain it will be:

Most important is the uncertainty with regard to inflation. The individual is concerned not with money amounts but with what the pension will buy.14

Despite this, the Committee held back from recommending that Limited Price Indexation (LPI) requirements should be made retrospective:

4.18.71 A minority of us believed that without indexation of past accruals the value of the pension promise would be progressively undermined, but recognised that to require all earnings-related schemes to introduce LPI for pension rights accrued before the appointed date would place a considerable burden of costs on such schemes. Transitional arrangements which phased in the indexation of past accruals would help employers to control their costs. These could take the form of requiring scheme to LPI to only the most recent five years of past service at the time indexation is introduced for future accruals. Five years after that, a further five years of past accruals would be indexed. By repeating this pattern, all past service accruals would eventually be covered by LPI within twenty years. However a majority of us considered that, even with transitional arrangements, indexation of past accruals could not be justified.

4.18.72 In the light of this divergence of review, we have no recommendation to make on indexation for past or future accruals.15

The Pensions Act 1995 introduced Limited Price Indexation (LPI) – i.e. a general requirement that pension arising from an occupational pension scheme accruing from 6 April 1997 had to be increased at a minimum by inflation capped at 5%.16

12 See SN-04956 Guaranteed Minimum Pension – annual increases (Thursday 2015) 13 See Library Briefing Paper 95/48 The Pensions Bill: Non-state benefits, 18 April

1995;Pension Law Reform. The report of the Pension Law Review Committee, para 4.18.67

14 Pension Law Reform. The report of the Pension Law Review Committee, para 3.1.10 15 Pension Law Reform. The report of the Pension Law Review Committee, vol 1 16 Pensions Act 1995, section 51-5 and the Occupational Pension Schemes (Indexation)

Regulations 1996 (SI 1996 No 1679) as amended; HL Deb 24 October 1995 c977

8 Occupational pension increases

Despite the fact that LPI was not made mandatory for rights accrued from 1997, it appears that many schemes applied some form of inflation protection to pensions in payment on a voluntary basis and many applied LPI as made mandatory in 1997 retrospectively to all service.17

2.2 Reduction in the cap In 2002, Alan Pickering – who had been asked by the Labour Government to look at ways of simplifying pensions legislation and reducing costs - emphasised the need to keep schemes affordable to employers:

It is important that employers keep their pension promise. However, we also think it should be easier for employers to re-shape pension arrangements in the light of contemporary economic or other circumstances. This might seem to be a considerable loss but it is better than an employer faced with unsustainable costs in their defined benefit schemes having to close the scheme altogether. A careful balance needs to be struck here between giving employers the right to amend pensions in the light of changed circumstances and their responsibility to keep their pension promise.18

He recommended that LPI should be abolished on the grounds that it was “disproportionately expensive.”19

However, the Labour Government was unwilling to make changes to the LPI unless it “had good reason to believe that the coverage of and contributions to occupational pensions would be higher than would otherwise be the case.”20 In its June 2003 occupational pensions White Paper, the Government announced that it had decided to reduce the LPI cap to 2.5%:

10. We have therefore decided that we will relax this requirement, so that schemes are required only to index pensions in payment by inflation, as measured by the September annual increase in the Retail Price Index (RPI), capped at 2.5 per cent each year. This reflects the reality of an economic climate where inflation has been driven down to average just 2.4 per cent over the years since 1997. The change will also better align the regulation of defined benefit and defined contribution schemes – members of the latter are not generally obliged to purchase any cover against inflation at all.21

This was implemented for DB schemes by the Pensions Act 2004, with effect from April 2005.22

17 Lewin and Sweeney, Deregulatory Review of Private Pensions- a consultation paper,

March 2007; See ONS Occupational Pension Schemes Survey 2015, Table 18 18 Alan Pickering, A simpler way to better pensions, July 2002 19 Ibid, para 2.10-11 20 DWP, Simplicity, security and choice: Working and saving for retirement, December

2002, Cm 5677, chapter 4, para 45 21 DWP, Simplicity, security and choice: Working and saving for retirement. Action on

occupational pensions, June 2003, Cm 5835 22 Pensions Act 2004, sections 278 and 279

9 Commons Library Briefing, 8 December 2017

2.3 Deregulatory review In December 2006, the Labour Government asked Chris Lewin (formerly Head of UK pensions at Unilever) and Ed Sweeney (then joint Deputy General Secretary of Amicus) to conduct a ‘deregulatory review’ of private pensions.23 They looked at whether the requirement to index-link pensions in payment should be removed but were unable to agree:

We both, for example, recognise the strength of the arguments for and against the removal of the current requirement to provide limited price indexation (“LPI”) after retirement, but have been unable to agree on whether removal would have the desired outcome in terms of encouraging continued strong provision through workplace-based pension schemes. Ed Sweeney believes that the case has not been made that employers would keep their defined benefit schemes open or adopt risk sharing approaches if LPI were abolished. Chris Lewin, on the other hand, believes that making LPI optional would open up important new avenues for risk-sharing and creativity in scheme design as well as encouraging scheme sponsors to continue to fund defined benefit provision.24

The Government decided not to remove the requirement on the grounds that it was an important protection for members and there was no clear evidence that removing it would have a direct and significant effect on employer provision:

Removing the requirement to increase pensions in payment has the potential to deliver significant savings for employers, but at the expense of future pensioners. In the absence of clear evidence that removing the LPI requirement would have a direct and significant effect on employer provision, the Government does not believe that the removal of such an important protection for members would strike the right balance between employer concerns and member protection and has therefore decided not to make any changes to the current requirements.25

This decision was welcomed by the TUC.26 The CBI said it had considered a proposal to make LPI increases discretionary but that consultation had indicated that few of its members would chose to implement it. For this reason, “it would have very limited impact in securing defined benefit provision in the future.”27 The Association of Consulting Actuaries had argued that the LPI should be removed in respect of future service.28

Chris Lewin and Ed Sweeney found that some schemes were prevented by “restrictive language in scheme documents” from taking advantage of the change to a 2.5% cap on LPI. This could be addressed by allowing trustees to change scheme provisions by resolution under

23 Lewin and Sweeney, Deregulatory Review of Private Pensions. A Consultation Paper,

March 2007 24 Ibid, Executive Summary 25 DWP, Deregulatory review – Government response, October 2007, p5-6 26 TUC Press Release, ‘Deregulation review "goes a step too far"’, says TUC, 22

October 2007 27 CBI official response to Sweeney/Lewin Deregulatory Review of Private Pensions, 30

April 2007 28 ACA, Response to the Deregulatory Review, April 2007

10 Occupational pension increases

section 68 of the Pensions Act 1995, where employer and trustees agreed.29

The Government consulted on proposals to introduce a statutory override to enable schemes to take advantage of the reduction in the cap on LPI and revaluation.30 In its December 2007 response to the consultation, the Government said the statutory override should only be exercisable with the proper agreement of both trustees and employers and (for indexation) would be for future service only.31 The change was introduced in the Occupational, Personal and Stakeholder Pensions (Miscellaneous Amendments) Regulations 2009 (SI 2009/615).

2.4 Switch to the CPI The primary legislation does not specify which measure of inflation should be used for minimum indexation and revaluation. Instead, it refers to the “percentage increase in the general level of prices in Great Britain.”32 On 8 July 2010, the then Pensions Minister Steve Webb announced that the Government would switch from using the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) for determining the percentage increase in prices used to set the required annual increase:

The Chancellor of the Exchequer announced in the Budget statement on 22 June that, with some exceptions, consumer prices rather than retail prices will be the basis for uprating most benefits and public sector pensions. The Government believe the CPI provides a more appropriate measure of pension recipients' inflation experiences and is also consistent with the measure of inflation used by the Bank of England. We believe, therefore, it is right to use the same index in determining increases for all occupational pensions and payments made by the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS).

Consequently, we intend to use the CPI as the basis for determining the percentage increase in the general level of prices for the 12 months ending 30 September 2010 when preparing the order required under paragraph 2(1) of schedule 3 to the Pension Schemes Act 1993 in relation to revaluation and indexation of pension rights in defined benefit pension schemes, and the order made under section 109 of that Act in relation to increases in guaranteed minimum pensions paid by contracted-out defined benefit schemes in respect of pensionable service between 1988 and 1997; and amend legislation to enable CPI to be used for relevant increases in respect of the [Pension Protection Fund] and [Financial Assistance Scheme].Using CPI will mean making some small changes to primary legislation to ensure we can apply it fully in every circumstance. We will bring these before Parliament at the earliest opportunity.33

The legislation set a statutory minimum and did not prevent schemes from making more generous arrangements:

29 Lewin and Sweeney, Deregulatory Review of Private Pensions, An independent

report to the Department for Work and Pensions, July 2007, p24 30 DWP, Deregulatory review – Government response, October 2007, Executive

Summary 31 DWP, Deregulatory review – Government response to consultation, Dec 2007, p7 32 Pensions Schemes Act 1993, schedule 3 (2) 33 HC Deb, 8 July 2010, c14-16 WS

11 Commons Library Briefing, 8 December 2017

Statute provides a floor above which occupational pension schemes have to operate. In other words, we will not force occupational pension schemes to cut their increases; we simply provide a floor, which used to be linked to the RPI and is now linked to the CPI. Schemes remain entirely free to go beyond that if they wish.34

A DWP press release explained how the change would be made:

The proposed changes will affect how many deferred pensions are revalued in future, and how pensions in payment are increased. The changes apply to defined benefit rights in occupational pension schemes, and certain defined contribution rights in occupational pension schemes. The changes will affect the statutory minimum requirement for revaluation and indexation; occupational pension schemes will still have the freedom to pay more than the statutory minimum.

In broad terms, a revaluation order is made each year which sets out the minimum rate at which occupational pension schemes should generally revalue deferred pension rights and pay increases on pensions in payment.

For deferred pension rights, the order tabulates an overall revaluation percentage relating to each possible number of complete years between the end of someone’s pensionable service and their normal pension age. The order that is in use for any year will use data on price inflation up to September of the previous year. For example, the order in use for 2010 uses data on price inflation to the year ending 30 September 2009 based on RPI. The order which will be in use in 2011 will use data on price inflation to the year ending 30 September 2010 based on CPI. The overall percentage that will apply to deferred pension rights which have been deferred for at least two complete years, where the relevant years straddle the change from RPI to CPI, will therefore be calculated as a combination of percentages based on RPI and then CPI.

The order in use for 2011 will also be used to calculate annual increases on pensions in payment for 2011, and these will be in line with CPI. The Government expects to publish the order in November or December 2010.

The Government will bring forward legislation at the earliest opportunity to ensure that other references to price inflation in pensions law are consistent with using CPI as the measure of price inflation from 2011 or as soon thereafter as Parliamentary time allows. For example, the Guaranteed Minimum Pension Increase Order that will come into effect in 2011 will be made on the basis of the CPI figures for the year to 30 September 2010.

2.5 Responses TUC expressed concern, describing the change it as a “stealth cut on the pensions of middle income Britain”:

Over someone's whole retirement this will add up to a significant loss. CPI is less than RPI in most years because it excludes housing and council tax costs. But even if all other things are equal CPI is on average half a per cent less than RPI because it is calculated in a different way if pensions in payment today had been linked to

34 HC Deb, 19 July 2010, c4

12 Occupational pension increases

CPI instead of RPI for the last twenty years they would now be 14 per cent lower.35

On the other hand, the Pensions and Lifetime Savings Association said it would allow trustees and fund managers more flexibility and make it a “little easier for firms to keep schemes open.” It argued that “the detail needs to be right so that the change can be applied smoothly and simply.” 36

The CBI hoped the Government would introduce overriding legislation, to help schemes take advantage of the change (see 0 below):

Statutory indexation is the biggest single regulatory cost borne by final salary schemes. That makes getting it right important. As CPI is a more accurate reflector of inflation for pensioners than RPI, we welcome this announcement. We hope that the Government will also table overriding legislation, to ensure that schemes whose rules currently prevent them from taking advantage of this change can do so.37

In February 2012, a petition on the Downing Street website calling for the RPI measure to be re-introduced for public and private pensions had over 100,000 signatures.38

Impact The impact of the switch to the CPI would depend on whether a scheme provided indexation and revaluation in accordance with the statutory minimum, or whether it had RPI written into its rules.39 The Government estimated that three quarters of schemes had RPI written into their scheme rules for indexation but only a quarter had done this for both indexation and revaluation. The one quarter of schemes with RPI-linked indexation and revaluation would not see a change in their liabilities (though without legislation to remove the CPI underpin, they would have seen an increase). Those with RPI-linked indexation but revaluation by the statutory minimum would see liabilities reduce by an average of 16%. Those schemes which did both indexation and revaluation according to the statutory minimum (less than one in five schemes) would see a 20% reduction in liabilities. As regards the impact on scheme members, the then Pensions Minister Steve Webb said:

If a person gets done by CPI on revaluation and CPI on indexation, and they are an average person leaving the scheme 15 years before the end on a average income with average characteristics, it might be a 20% impact over the course of their retirement. So it is an average worst-case scenario. 40

The impact on individuals would “vary enormously according to age, length of service and so on.”41

35 TUC Press Release, 8 July 2010, ‘CPI indexing will reduce value of occupational

pensions’ 36 PLSA Press Release, ‘Indexation changes give final salary pensions more flexibility’, 8

July 2010 37 CBI Press Release, ‘CBI comments on changes in occupational pensions’ 8 July 2010 38 Petitions to the UK Parliament, Public and private pensions - change from RPI to CPI 39 DWP, Impact of the move to CPI for occupational pensions, 12 July 2011 40 PBC Deb, 14 July 2011 (afternoon), c305 41 Ibid, c305

13 Commons Library Briefing, 8 December 2017

Consultation on statutory override The Government believed that many of the 70-80% of scheme members that had RPI-indexation written into their rules would find it hard to change them.42 Whether they were able to do so would depend on a number of factors:

Whether the scheme has any relevant amendment provisions within the trust deed and rules. Some do not – sometimes as deliberate policy to fetter future discretion

• The extent of amendment powers. Some are limited to specific provisions, either by default or design

• The question of where any amendment powers are vested. Some amendments are at the discretion of the employer, some the trustees and some a combination of both. (Any change that might increase costs in a DB scheme will generally require at least the consent of the employer) 43

Schemes that contained relevant amendment powers may not find it easy to change the basis for indexation of pensions in payment or revaluation. This is because:

• trustees will be conscious of their duty to act in the best interests of the beneficiaries of the trust, and would need to reconcile that duty with any change expected to erode the value of benefits in the long run. There will of course be counter-arguments to consider relating to the longer term viability of the scheme

• there are legislative restrictions on modifications to schemes in section 67 of the Pensions Act 1995. Considering whether explicit references to RPI indexation and revaluation in the rules of an occupational pension scheme constitute a “subsisting right” raises a number difficult legal questions (see also para 40 below)

• trustees will need to consider whether any reference to RPI in scheme rules or other scheme documentation confers any rights to indexation or revaluation at a particular rate

• the power to amend may impose onerous conditions before it can be used e.g. consultation, evidence, administration issues etc. 44

It considered whether to introduce legislation directly over-riding scheme rules but decided against this on the grounds that it would:

a) represent an unwarranted interference in the rights of employers and trustees to manage their financial affairs. It would potentially override arrangements agreed through collective bargaining arrangements, privatisation agreements and private contracts;

b) create unnecessary complications and difficulties in respect of employment and other contracts; and

c) potentially have a detrimental impact on members in schemes where the employer is prepared to fund

42 DWP, The impact of using CPI as the measure of price increases on private sector

occupational pension schemes, December 2010, para 37 43 Ibid, para 38 44 Ibid, para 39

14 Occupational pension increases

increases at a rate above the required statutory minimum.45

An alternative would be to make it easier for schemes to change their own rules. However, the Government decided against this on the grounds that trust in pensions was important and government intervention demanded strong justification.46 Where a scheme did intend to change its rules for future accruals, employers would be required to consult.47

While the Government’s decision was welcomed by the TUC, the Pensions and Lifetime Savings Association expressed that concern pension funds were under great stress and needed to be given “the breathing space that an option to switch to the CPI would have given.”48

The Government legislated in the Pensions Act 2011 to ensure that where a scheme had chosen to stick with RPI increases, if the CPI was higher in any particular year, the scheme could still pay an RPI-linked increase.49 It also removed references to the RPI for the purposes of calculating indexation of Pension Protection Fund compensation.50

2.6 Westminster Hall debate – the impact on pensioners

Opening a Westminster Hall debate on the Digital Equipment Ltd: Pension Scheme on 17 January 2017, Corri Wilson drew attention to the impact on scheme members of not receiving indexation on pre-1997 pension rights:

The Hewlett Packard Pension Association claims that withheld cost of living increases have so far cost pensioners an average of £24,000 compared with their colleagues whose contributions were made post-1997. That has led to severe financial hardship for many of those pensioners and has resulted in them being unable to afford an ordinary living pattern, being on the verge of poverty and requiring Government subsidies in the form of income support benefits.51

She called on the Government to address the issue in its forthcoming Green Paper on defined benefit pension schemes.52

Pensions Minister Richard Harrington responded that Government had a broad principle of not imposing requirements retrospectively:

The Government have a broad principle in legislation, which I think is generally fair, of not imposing such retrospective changes, because of uncertainty. There is no doubt that this kind of

45 Ibid, para 31 46 Ibid, para 44 47 Ibid para 15-18 48 Sebastian Cheek, ‘Industry blasts RPI-CPI announcement’, Professional Pensions, 8

December 2010 49 Pensions Act 2011, s19 50 Ibid s20; For more on the background to this, see section 4 of Library Briefing Paper RP 11/52 Pensions Bill (June 2011) and RP 11/68 Pensions Bill: Committee Stage Report (October 2011). 51 HC Deb 17 January 2017 c272WH 52 Ibid

15 Commons Library Briefing, 8 December 2017

change—this is not the only one we are lobbied about—will place unexpected and significant costs on employers.53

When legislation was first passed to require limited price indexation, the government of the time had been conscious of the need to balance the interests of different parties. The same applied now:

We believe that the Government retrospectively changing the legislative requirements on indexation would be inappropriate and would have a significant impact on the schemes of employers involved. The legislation introduced in 1995, by Harold Macmillan’s successors in a Conservative Government, was introduced to provide a limited level of inflation protection. The then Government were conscious of this balance between protection against inflation and the ability of the schemes, and the employers who stand behind them, to afford such protection. Of course, the financial deficits in defined-benefit schemes are very much a topic of conversation in this House and in the press—particularly the trade press—and are something that will be discussed in the Green Paper.54

Although campaigners had argued that the effect of making rule changes would be “minimal”, he had not seen any evidence to this effect. The Government would “do some further work and would be grateful for further data, to assess what the actual cost would be.”55

2.7 February 2017 DB Green Paper In its February 2017 DB Green Paper, the Government said the evidence was not strong enough to suggest that indexation should be reduced or abandoned across the board, particularly given the potential impact on scheme members and the gilt markets:

273. Various commentators have suggested that indexation should be cut to reduce the burden on employers, either by allowing all schemes to reduce indexation to the statutory minimum, or to allow those schemes (around 75%) which have RPI written into their scheme rules to move to the currently lower CPI measure.

274. However, allowing all schemes to move from RPI to CPI or to move to statutory minimum indexation only (including removing any pre April 1997 indexation) would have significant impact on members’ benefits. CPI has been lower than RPI in 22 years out of the last 27 years (and in 9 years, out of the last 10 years) up to 2015, and so would in all likelihood represent a reduction in members benefits. Many schemes also pay indexation above the statutory minimum.

275. Estimates from the Regulator are that moving from RPI to CPI would reduce aggregate scheme liabilities on a Technical Provisions basis by around 5-10%. Moving to statutory indexation only would mean an estimated of 15-20%.76

276. However, this could have a significant impact on members. Estimates from Hymans Robertson77 show that a move from RPI to CPI would take away around £20,000 in benefits over an average

53 HC Deb 17 January 2017 c279WH 54 Ibid, c281-2WH 55 Ibid c279

16 Occupational pension increases

DB scheme member’s life. Moving to statutory indexation only would increase this loss to members substantially.56

277. It would also likely have significant interactions with the gilt market and wider government financing objectives. Currently, index-linked gilts (ILGs) are linked to RPI, as this was the standard measure of inflation when ILGs were introduced. As pension funds hold nearly 23%78 of their assets in ILGs, any changes to scheme indexation could have significant consequential effects on the price of these gilts, which would affect the Government’s ability to issue debt in a cost-effective way.

However, it said there could be a case to suspend indexation in cases where the employer is stressed and the scheme is underfunded or for rationalising arrangements:

Conditional indexation

280. One suggestion is that increases should be conditional on the scheme and the sponsor having the resources to make the payments – so that no increases would be paid, for example, if the scheme was in deficit and the sponsor was unable to make up the deficit, and the trustees were satisfied that the best interests of members would be served by suspending indexation to allow the employer to strengthen its corporate finances. Increases could be restarted in future years once the employer had recovered. The Work and Pensions Select Committee in their recent report recommended permitting trustees to propose changes to scheme indexation rules, in the interests of members.

281. Whilst this may be a suitable way of ensuring that stressed schemes and their employers are supported in their endeavour to address deficits in hard times, as with all measures designed to help a subset of stressed schemes and employers, there is a moral hazard issue. There is the danger this could encourage employers to allow the funding level of their scheme to deteriorate in the hope that this would help reduce their liability to inflation link the scheme benefits. Therefore, requirements that the sponsor funds the scheme to a high level and limits risk when ‘times are good’ may be needed in conjunction with allowing relaxations in times of stress.

282. We would be interested in views about whether indexation should be suspended in some circumstances, and if so, in what circumstances that could be allowed and how the moral hazard issues could be addressed.

Rationalising indexation

283. The purpose of indexation of member benefits is to provide a measure of protection against the true value of benefits being eroded over time by the effects of inflation. As Table 5 below shows, it is currently something of a lottery as to whether a particular scheme has rules which refer simply to the statutory minimum, or whether they refer to a specific index such as RPI, or commit to a specific percentage each year. The Government’s preferred measure of inflation is currently CPI, which tends to be lower than RPI, although it is worth bearing in mind that CPI(H), may possibly become the official measure of inflation used by the Office for National Statistics (ONS) by March 2017.

56 DWP, Security and Sustainability in Defined Benefit Pension Schemes, Cm 9412,

February 2017, p62

17 Commons Library Briefing, 8 December 2017

284. There is an argument that if the fundamental nature of the promise that was made to members was to protect them against inflation, then the specification in scheme rules of a particular rate of increase, or a specific index, may have made sense at the time, but may now be anachronistic, and has little to do with the fundamental nature of the promise to protect against inflation.

285. The PLSA DB Task Force research found that “increasing pensions by a lower level of inflation was seen to be the most palatable benefit adjustment if one had to be made”. Introducing a statutory over-ride to allow schemes to switch from RPI to CPI could amount to a saving to sponsors and lower future pension increases for members amounting to £90 billion as discussed previously. However, the changes would impact schemes differently, where the largest schemes would experience the largest monetary savings, and not all schemes would see a benefit from such an easement, but some members’ pensions would be significantly lower.57

It asked for views on the following:

g) Is there any evidence to suggest that there is an affordability crisis that would warrant permitting schemes to reduce indexation to the statutory minimum?

h) Should the Government consider a statutory over-ride to allow schemes to move to a different index, provided that protection against inflation is maintained?

• Should this also be for revaluation as well as indexation?

i) Should the Government consider allowing schemes to suspend indexation in some circumstances?

• if so, in what circumstances?58

The Government intends to publish a White Paper later in 2017.59

Initial responses The proposal to allow schemes to move to a different price index (such as the CPI) got different responses. The CBI said it “could provide real

57 Ibid 58 Ibid 59 HCWS48, 13 July 2017

18 Occupational pension increases

support to businesses.”60 On the other hand, the trade union Prospect was opposed, saying:

We challenge the simplistic notion that changing the indexation of some pensions currently in payment from RPI to CPI will improve the medium to long-term funding of schemes or future occupational pensions provision. “These employers are likely to see this as a neat way of reducing their costs and are unlikely to redirect any savings into future pensions provision. At a time when large employers pay £5 in dividends to shareholders for every £1 paid in to the occupational pension scheme, we have little confidence that any changes will create sustainable improvements in the funding of such schemes.61

On the proposal to allow indexation to be suspended in some circumstances, former Pensions Minister Sir Steve Webb said:

The most worrying proposal is to allow certain schemes to ‘suspend’ annual pension increases if money is tight. With rising inflation, annual indexation is an important part of protecting the living standards of the retired population. There is a significant risk that relaxing standards on inflation protection with the best of intentions for exceptional cases could be exploited and lead to millions of people being at risk of cuts in their living standards.62

In the interim report of its DB task force, the Pension and Lifetime Savings Association found that “increasing pensions by a lower level of inflation was seen to be the most palatable benefit adjustment if one has to be made.”63

The most worrying proposal is to allow certain schemes to ‘suspend’ annual pension increases if money is tight. With rising inflation, annual indexation is an important part of protecting the living standards of the retired population. There is a significant risk that relaxing standards on inflation protection with the best of intentions for exceptional cases could be exploited and lead to millions of retired people being at risk of cuts in their real living standards.”

60 61 DB green paper’s case for indexation flexibility divides industry, Professional

Pensions, 20 February 2017 62 DB Green Paper puts living standards at risk for millions – Steve Webb, Royal

London, 20 February 2017 63 PLSA, DB Taskforce interim report, October 2016, p25

19 Commons Library Briefing, 8 December 2017

3. British Steel Pension Scheme

3.1 Consultation on proposal to allow the scheme to change indexation and revaluation rules

On 26 May 2016, the Government launched a consultation on various options to help the British Steel Pension Scheme (BSPS). Its objective was to find a solution that achieved separation of the BSPS from Tata Steel UK, subject to its funding position being strong enough to exist outside the Pension Protection Fund.64 It said Tata and the BSPS trustees had asked Government to allow them to amend scheme rules in order to reduce the levels of indexation and revaluation payable on future payment of accrued pension rights to the minimum level required by law. This was option three in the consultation:

Option 3: Reduction of the Scheme’s Liabilities Through Legislation

Reducing indexation and revaluation payable on future payment of accrued pension rights within the BSPS

81. As a part of their engagement with Government over TSUK, the BSPS and Tata approached the Government with a proposal that they believe would deliver a better outcome for most members than PPF entry whilst also allowing for a separation of the scheme from TSUK.

82. The scheme trustees have a duty to act in the best interests of the scheme members as a whole. The trustees argue the scheme is funded to above PPF levels on an on-going basis and that as a result most members would be better off if a way could be found to pay benefits outside the PPF.

83. The BSPS trustees believe that they have sufficient assets to pay members at above PPF levels of benefit on an on-going basis – in other words, the trustees believe that they could not pay members the amount of pension they were originally promised, but should be able to pay most of them the same as or more than they would receive should the scheme enter the PPF. Tata also support the proposal.

84. Tata and the BSPS trustees have asked the Government to legislate to allow them to amend the scheme rules in order to reduce the levels of indexation and revaluation payable on future payment of accrued pension rights. The trustees would reduce indexation and revaluation to the minimum level required by law.

85. The proposal would reduce the level of future inflation increases payable on all BSPS pensions in payment and deferment to a similar or slightly better level than that paid by the PPF. If adopted, this would mean that in the future existing pensioners would receive lower increases to their pensions than they would under the current scheme rules, or possibly no increases at all. Deferred members would also receive a lower increase to their preserved pension when they reached normal pension age, and would then receive the lower increases to their pension payments.

64 DWP, British Steel Pension Scheme – a consultation, May 2016, p 13

20 Occupational pension increases

86. Because less pension would be paid to members under the proposal, the BSPS trustees believe that making these changes would improve the scheme’s funding position to the point that it would no longer be in deficit on an on-going basis. It should therefore be able to continue to run on with a sponsoring employer outside the PPF, paying out pensions that were above PPF compensation levels for the majority of scheme members.

87. The Government would need to be satisfied that this would be indeed the case before legislating as proposed.65

The Government acknowledged that the proposed changes would reduce members’ future pension payments in real terms and represented ‘a substantial loss to many members compared with the pension they would have expected.’ However, for most people, the proposal was the same or better than they would get in the PPF. This is because, for people below normal retirement age when a scheme enters an assessment period, the PPF provides compensation at 90% subject to a cap.66 PPF compensation payments are increased in line with prices capped at 2.5% in respect of rights accrued from April 1997.67 For more detail, see Library Briefing Paper SN-03917 An overview of the Pension Protection Fund (October 2016).

The Government explained how regulations would need to change to implement the proposals:

98. The legislative system protecting members’ defined benefit pension rights does not allow for a scheme’s trustees or sponsoring employer to reduce accrued pension rights without member consent.

99. However, pensions legislation prevents unilateral changes to member benefits in a way that is detrimental to members’ rights in the scheme.

100. Members of some defined benefit schemes have in the past consented to reductions in benefit (to above PPF compensation levels) where the alternative is PPF entry. However, the BSPS trustees have concerns about getting individual member consent to a reduction in indexation and revaluation levels. The sheer size of the scheme means that getting individual consent for a meaningful number of members would be difficult.

101. In order to make the proposed changes, the Government would therefore need to make regulations allowing the scheme to step outside the normal regulatory framework by making changes without individual member consent.68

65 Ibid p24-5 66 Ibid p27 67 Pensions Act 2004, Sch 7, para 28; Pension Protection Fund - compensation 68 DWP, British Steel Pension Scheme – a consultation, May 2016, p28

21 Commons Library Briefing, 8 December 2017

Accordingly, the consultation asked for views on the case for “disapplying the section 67 subsisting rights provisions for the BSPS in order to allow the scheme to reduce indexation and revaluation.” The Government said it would only consider this if regulations contained “clear safeguards to ensure member protection was not further compromised.” It would also look to impose a series of conditions that the sponsoring employer would need to meet as part of any agreement to facilitate a reduction in indexation and revaluation.69

It also asked for views on option 4 – to allow “for bulk transfers without member consent to a new scheme paying lower levels of indexation and revaluation.”70

The Government produced a factsheet on the consultation.71

Initial comment Chair of the BSPS trustees Allan Johnson welcomed the consultation “as it would be a better outcome for members than entering the Pension Protection Fund (PPF).”72 The trustees said to scheme members:

The Trustee believes that exchanging the Scheme's assets for PPF compensation would be a poor outcome. The Trustee believes that the Scheme's assets are more than enough to meet the cost of paying PPF compensation and that it would be better for the Scheme to stay out of the PPF. The Scheme could then provide modified benefits at levels which, for the vast majority of members, would be better than PPF compensation. The Trustee would then adopt investment policies designed to minimise the risk of not being able to pay the modified benefits at any time in the future. This would enable the Scheme to stay out of the PPF at the present time and minimises the risk of having to go into the PPF in the future.

In other words, the Trustee believes that it is better to use the Scheme's assets to provide modified benefits under the Scheme than to hand them over to the PPF so that members are paid PPF compensation.

The modifications to Scheme benefits needed to achieve this preferred outcome would not be as severe as the cuts that would result from going into the PPF. The modifications would be made using a Scheme rule that allows future pension increases to be reduced. Pensions in payment would still have increases at least equal to those required by law. Deferred pensions would have future increases calculated by reference to the Consumer Prices Index instead of the Retail Prices Index.73

Royal London Director of Policy and former Pensions Minister Steve Webb called on the Government to ensure that those affected understood the implications i.e; that for some pensions could be frozen:

69 Ibid p31 70 Ibid p32 71 DWP, British Steel Pension Scheme – Consultation Factsheet, May 2016; House of

Commons Deposited Paper- 2016-00498 72 ‘Tata Steel Pension Scheme Chief backs controversial cuts,’ The Guardian, 26 May

2016 73 British Steel Pension Scheme – news and updates, Letter to scheme members, 26

May 2016

The ‘subsisting rights’ provisions Section 67 of the Pensions Act 1995 provides that scheme rules can only be changed to affect accrued rights if:

• The changes are actuarially equivalent i.e. an actuary has certified that there is no reduction in overall benefit entitlement; or

• The individual member consents

22 Occupational pension increases

Under the rule change, the trustees of the scheme would be allowed to reduce inflation protection from the Retail Prices Index to the generally lower Consumer Prices Index. But a second aspect of the rule change would result in some pensioners having their pension (and any pension for their widow) completely frozen or largely frozen. This is because the legal requirement to index all of a pension in payment only applies in respect of years of service since 1997 – for service before that date, there is only a very restricted legal requirement to uprate the pension and only then for a limited period. This means that an older pensioner who did all of their service before 1997, and particularly before 1988, could have their pension frozen. More generally, older pensioners who did most of their work before 1997 will see a large part of their pension frozen with only a very small annual increase.74

He said this was a big issue for BSPS pensioners but an even bigger issue if the principle was applied more widely to other schemes.75

In the Financial Times, pension consultant John Ralfe expressed concern that an exception once made could become the norm and that the proposal would drive “a coach and horses through the fundamental principle that pension promises, once made, cannot be changed retrospectively.”76

Pensions consultants Hymans Robertson said that on the face of it the proposals “look to be in the best interest of scheme members” but warned that care should be taken not to “open the floodgates.”77

Pensions Lawyer, Robin Ellison said that trustees of other schemes might question why the Government was extending “special help” to the BSPS.78

The FT reported that the BSPS trustees were investigating whether the change could trigger legal action from pensioners who transferred in in 1990 from a predecessor scheme.79

Consultation responses The consultation closed on 23 June 2016 and the Government had not responded to the consultation by the time the 2017 general election was called.80

Response of outside bodies

The National Trade Union Steel Coordinating Committee (NTUSCC) – comprising Community, Unite and GMB – said that given the very particular circumstances facing the BSPS, it supported the proposal to allow modifications to be made to scheme benefits, provided certain conditions were met. In particular, there should be a “no worse

74 ‘Oldest pensioners "could lose over £10,000" from government plans to change

pension rules - Steve Webb, Royal London’, 4 June 2016 75 Ibid 76 ‘Got a final salary pension? Time to steel yourself’, Financial Times, 2 June 2016 77 Consultation to keep British Steel pension scheme outside PPF could benefit most

members, The Actuary, 1 June 2016 78 British Steel pension rule change plans 'understandable but unfair', says expert,

Outlaw.com 31 May 2016 79 ‘ Legal hurdle over pensions threatens Tata deal’, Financial Times, 3 June 2016 80 PQ 51468 9 November 2016

Deregulatory review

Lewin and Sweeney, who looked at the subsisting rights provisions as part of their ‘deregulatory review’ commented that: […] the premise on which this legislation is based – that benefits firmly promised and earned during periods of past service should not be changed unless the member agrees or receives equivalent benefits in exchange – seems unassailable. (Report to DWP, July 2007). For more on the review, see Library Briefing Paper SN-04515 (September 2009).

23 Commons Library Briefing, 8 December 2017

member outcome than if the Scheme entered the PPF”. It thought there was a strong case for the Government making a substantial payment to the scheme, in respect of the period when British Steel was in public ownership:

[…] the NTUSCC is of the view there is a strong case for the government, in the event of benefit modification, to make a sizeable payment to the Scheme relative to the costs of pensions increases for benefits accrued whilst British Steel was in public ownership between 1967 and 1988. Under benefit modification it is currently envisaged that benefits accrued during that period would receive no increases whatsoever, and we would urge the government to take responsibility to remedy this unfairness. We would also seek to understand the implications for the Scheme should the government acquire a stake in the business of up to 25%.81

The Labour Party expressed concern that the proposals could “fall too heavily on scheme members and could lead to other troubled businesses seeking to water down staff pensions.”82

The Pension Protection Fund said that both option 3 (legislation to enable the BSPS to reduce indexation and revaluation to the statutory minimum) and option 4 (enabling a bulk transfer of scheme members - with an opt out provision - to a new scheme with a reduced benefit structure) posed “significant risks for relatively limited gains”:

Both options 3 and 4 pose significant risks for relatively limited gains and raise significant questions of equity between the treatment of BSPS and the PPF’s members and levy payers, which could be tackled in different ways. The reduced benefit levels proposed by the trustees under each of these options would remove much of the distinction between the benefits members would receive in the existing scheme (or any new scheme under option 4) and the level of compensation they would receive from the PPF. The majority of members would receive roughly the same as they would in the PPF and a minority would be worse off. The number that are worse off could grow depending on the early retirement and lump sum commutation factors the scheme intends to use. Against this - in the absence of a genuine sponsoring employer - PPF levy payers would be directly underwriting the risk of the existing or new scheme’s investment strategy failing. There would also be risks of other schemes seeking similar arrangements. We therefore believe that if Government wishes to enable either of these options it should seriously consider making any such scheme ineligible for PPF protection. If PPF eligibility is retained wider legislation may be needed to allow the risk based levy to be calculated appropriately and to provide effective protection for PPF levy payers (including appropriate controls over investment strategy, and triggers for PPF entry to prevent a significant deficit accumulating).83

81 NTUSCC, British Steel Pension Scheme: public consultation, June 2016 82 UK’s Tata pension plan changes stir Labour fears, Financial Times, 23 June 2016 83 British Steel Pension Scheme: Public Consultation Response from the Pension

Protection Fund, 21 June 2016

24 Occupational pension increases

It argued that the existing regulator levers provided “effective mechanisms to enable a separation of the scheme and employer in a way that balances and protects the needs of all concerned.”84

The Pension and Lifetime Savings Association supported a modified version of option three, provided additional safeguards were put in place:

The additional safeguards the PLSA would like to see put in place are that:

• the Government ensures legislative changes are scheme specific to the BSPS;

• the Government ensures that the PPF and the Pensions Regulator agree whether the scheme is eligible for PPF protection and what legal entity will continue to support the scheme, ensuring that all necessary securities are put in place; and

• the Government commits to a broader review of the legislative and wider challenges facing DB schemes.

This modified version of option three should enable the scheme to continue to provide good benefits for its members on a self-sufficient basis.85

Hymans Robertson said it would not support excluding members entirely from any decision to reduce the level of benefits payable:

While we agree that it is not feasible to obtain 100% agreement to any changes, particularly for very large pension schemes, we do think that in is important to obtain member support for any changes – possibly requiring 75% of the scheme membership to vote in favour of any compromise arrangement.86

It was concerned about the proposal to allow BSPS to be run as an ongoing scheme without a credible sponsor:

The effect of this proposal is that the BSPS members will continue to receive benefits in excess of those that would be payable under the Pensions Protection Fund (PPF) with all other scheme sponsors underwriting the (non-trivial) risk that the BSPS will need to be rescued by the PPF at some stage in future. In this case, any gains achieved by the BSPS will be enjoyed by members of the scheme through improved benefits or improved benefit security with any losses ultimately being borne by other UK pension scheme sponsors through an increased PPF levy.87

84 Ibid para 9 85 PLSA Response British Steel Pension Scheme, June 2016 86 Hymans Robertson, Response to British Steel Pension Scheme, 23 June 2016 87 Ibid

25 Commons Library Briefing, 8 December 2017

3.2 Regulated Apportionment Arrangement In November 2016, the FT reported that Tata Steel was planning to close the scheme to future contributions. However, this would still leave the question of how to manage the accrued liabilities. It was “actively exploring” various courses of action, including:

[…] the creation of a so-called “mirror scheme”, with benefits reduced in line with the original government proposals. Members would opt into this or otherwise go into the pensions lifeboat, the Pension Protection Fund, and face cuts of at least 10 per cent.88

ON 16 May 2017, TPR and the PPF reported that the key commercial terms of a Regulated Apportionment Arrangement (RAA) had been agreed in respect of the BSPS, although there were important details to finalise:

Lesley Titcomb, Chief Executive of The Pensions Regulator, said: “Good progress is being made in our discussions with Tata Steel UK (TSUK) and the trustees about the future of the British Steel Pension Scheme (BSPS). The key commercial terms of a regulated apportionment arrangement (RAA) have been agreed in principle between the company and the BSPS trustee. These appear to be in line with our published principles.

However, there are still important details to be finalised before we are in a position to approve the RAA and we are considering these carefully in light of their impact upon the 130,000 pension scheme members and PPF levy payers.

Pension restructurings which involve an RAA are rare, and we will only approve an RAA where stringent tests are met, so that they are not abused by employers seeking to inappropriately offload their pension liabilities.

We also continue to work with TSUK and the trustee in respect of the proposal to offer members an option to transfer to a new scheme sponsored by TSUK, which may occur should the approval to the RAA be granted, or stay in the BSPS and receive PPF compensation. The successor scheme would be subject to qualifying conditions.89

The PPF explained that:

Following the RAA, it is anticipated that if risk-related qualifying conditions relating to funding and size can be satisfied, a new pension scheme sponsored by TSUK will be set up. Members would then be given the opportunity to move to this new scheme prior to the existing scheme being assessed for entry to the PPF. Members of the scheme can be reassured that we are there to protect them throughout this process and they will be able to receive at least PPF levels of compensation, should they remain in the scheme and BSPS enter the PPF assessment period.90

On 11 August 2017, TPR said it had given initial approval to a proposal from Tata Steel (TSUK) to restructure the BSPS:

88 ‘Tata steel plans to close deficit-hit UK pension scheme’ Financial Times, 9 November

2016 89 TPR, Statement on British Steel Pension Scheme, 16 May 2017 90 PPF statement on the British Steel pension Scheme, 16 May 2017; See also, BSPS

Trustee Statement – Welcome to the British Steel Pension Scheme

What is an RAA?

In certain circumstances, TPR can grant approval to a Regulated Apportionment Arrangement (RAA). This usually involves removing the pension debt from the company, allowing it to continue to trade with a positive cash flow and potentially make a profit. RAAs are only possible where: a scheme is already in a Pension Protection Fund (PPF) assessment period, or expected to enter one; and the PPF agreed to the arrangement (usually because it would result in a higher level of funding for the scheme than if the employer became insolvent). For more information see PPF Media Factsheet on Restructuring and Insolvency (March 2017) and Library Briefing Paper CBP-04368 The Pensions Regulator: Powers to protect pension benefits (June 2017)

26 Occupational pension increases

This restructuring will be done through a regulated apportionment arrangement (RAA). The BSPS will receive £550 million from the Tata Steel Group, significantly more than it would receive in insolvency, and a 33% equity stake in TSUK.

Following completion of the RAA, the scheme will offer members the choice to either transfer to a new scheme (if it meets certain qualifying conditions) which will be sponsored by TSUK, or remain in the existing scheme which will transfer to the PPF.

Lesley Titcomb, Chief Executive of TPR, said: “We do not agree to these types of arrangements lightly but after several months of robust negotiations in this case, we believe that it is the best possible outcome for everyone involved in what is a very difficult situation.

“TPR is willing to work closely and constructively with employers who face real challenges in meeting their pension obligations due to difficult trading conditions. Our focus will always be on protecting members and the PPF. We have worked closely with the scheme trustees and the Pension Protection Fund to maximise the value received by the scheme.

“This proposal brings greater certainty for pension scheme members and unlocks the possibility of restructuring the company, which in turn could lead to preserving jobs.

“We are pleased that the employer has also agreed to sponsor a new scheme which has the potential to deliver higher benefits than PPF levels.”

TPR only granted clearance to the proposal after ensuring it met strict criteria designed to stop employers abusing the RAA mechanism. This included that the business would have become insolvent within the next 12 months if the RAA had not taken place, which would have left BSPS without its sponsoring employer.

In order to continue to trade, TSUK required ongoing funding from the Tata Steel Group, which it was not willing to provide until funding challenges for the existing scheme were resolved.

Whilst Tata Steel Limited indirectly owns TSUK, it has no legal obligation to fund the BSPS or to continue to provide support to TSUK because it is not the statutory employer.91

Members would be given a choice to switch to the new scheme (the New BSPS) or move with the old one into the Pension Protection Fund:

The New BSPS will pay the same benefits as the old BSPS except that future increases will be smaller. The modified benefits offered by New BSPS are expected to be better than PPF compensation for the vast majority of current pensioners and for many other members. 92

Details of the modified benefits were outlined in the Trustee's letter to members of 26 May 2016. This explained that:

The modifications would be made using a Scheme rule that allows future pension increases to be reduced. Pensions in payment would still have increases at least equal to those required by law. Deferred pensions would have future increases calculated by

91 Tata Steel UK’s proposal to restructure the British Steel Pension Scheme agreed by

TPR, PN17-48, 11 August 2017 92 Ibid

27 Commons Library Briefing, 8 December 2017

reference to the Consumer Prices Index instead of the Retail Prices Index.

The separation of the BSPS from Tata Steel UK was completed on 11 September after the Pensions Regulator issued its formal approval notice for the RAA.

In September 2017, chair of the Work and Pensions Committee Frank Field wrote to the Pensions Regulator (TPR) with concerns about the proposed indexation arrangements:

I have received numerous representations from BSPS members who have serious concerns about the proposal, in particular relating to the indexation of benefits accrued before 6 April 1997. In the new BSPS, increases will be set at a statutory minimum, meaning:

• No increases for pension benefits accrued before 6 April 1988, and

• Increases of benefits accrued between 6 April 1988 and 5 April 1997 will only apply to the Guaranteed Minimum Pension (GMP) element, subject to a 3% cap.

It has been estimated that the switch from RPI-indexation in the old BSPS to the statutory minimums offered by the new BSPS could result in a 60-year-old scheme member with all their service pre-1997 losing around 40% of their pension.

Many scheme members clearly feel that they are being railroaded into a choice between this outcome and an even worse deal in the PPF, which provides no increases at all in respect of pre-1997 accrued benefits.

On 25 August the BSPS trustees announced that the £550m injection from Tata Steel Group “will have a positive impact on the BSPS funding position and therefore reduce the underfunding reduction applicable” to those seeking a cash equivalent transfer value (CETV) to exit the scheme altogether. Given the improvement in the funding position, scheme members have queried how it has not also been possible to provide increases to pre-1997 benefits above the statutory minimum.93

TPR responded that:

Providing a higher level of pension increases in the New BSPS, and the additional funding strain it would have cased on TSUK, would have presented increased risks to TSUK and the PPF to the extent that it is unlikely that an agreement could have been reached between parties.

It is important to note that the New BSPS is not a foregone conclusion. Certain qualifying criteria, designed to safeguard members’ benefits by ensuring TSUK is able to support the New BSPS over the longer term, will need to be met. Whether the criteria will be met will not be known until the calculations are undertaken once members have made their decision regarding transferring to the New PSPS or receiving PPF compensation.94

93 Letter to TPR, 5 September 2017 94 Letter from TPR to chair of WPC, 12 September 2017

28 Occupational pension increases

3.3 Options for scheme members BSPS scheme members can choose between two options:

• to switch to a new scheme (the New BSPS) providing the same benefits as BSPS but with lower future increases; or

• to remain with the current BSPS and move into the Pension Protection Fund (PPF).95

The trustees said:

We're working hard to provide each member with the information they personally will need to make a choice that’s right for their situation. We will be holding meetings around the country in October and November, and will announce the details of these very soon. We will send out option packs containing personal information to every member in early October. We have set up a member website at www.bspensions.com/choose which will soon have more Q&As and in October we will launch a free and impartial helpline to help members to understand and talk through their options.96

The deadline for returning an option form has been extended from 11 to 22 December 2017. Information to support members in making a decision is on the BSPS time to choose website.

Bridging pensions The BSPS incorporates a bridging pension arrangement (referred to on the website as high/low pensions).

Therefore, some members will be affected by ongoing DWP consultation on how such arrangements should be taken into account in calculating Pension Protection Fund compensation.97 DWP explains:

Currently, members in receipt of a bridging pension at the higher rate when their scheme enters the PPF receive PPF compensation based on this rate for life. Had the pension scheme not entered the PPF, the member’s scheme pension payments would have reduced at State Pension Age (SPA) or at the point stipulated in their pension scheme rules (the decrease date). For some members, this means they may be financially better off in the PPF than they would have been under the rules of their scheme. This was never the intention, so the proposed changes will correct this anomaly, and going forward the compensation that these members receive, in this respect, will more closely reflect the benefits that they would have received in their pension scheme.98

The public consultation closed on 1 October 2017. The Government issues a further consultation on 17 November. This consultation was not on whether the Government should legislate to “correct the PPF bridging pensions anomaly” – it had already confirmed its intention to do this - but how. A significant proportion of respondents had expressed a preference for the alternative approach set out in the

95 British Steel Pension Scheme separated from Tata Steel UK, 11 September 2017 96 BSPS Trustee Update to scheme members, 21 September 2017 97 Gov.UK, Closed consultation: draft regulations to take account of bridging pensions,

updated 17 November 2017 98 DWP, Draft regulations to allow the Pension Protection Fund to take account of

bridging pensions. Technical consultation, November 2017

29 Commons Library Briefing, 8 December 2017

consultation – one “more closely aligning with the approach that schemes would have taken.” The most common reason given was that:

[…] the immediate drop in income for pensioners on the high element of their bridging pension could result in personal financial hardship, particularly where the bridge was a high proportion of the member’s overall pension.99

The changes to PPF compensation rules would come into effect in February 2018, subject to Parliamentary procedures.100

The changes would apply to members of pension schemes entering a PPF assessment period from the time the final regulations come into force.101 The PPF assessment period for the BSPS is expected to start on 29 March 2018.102 The trustees have said they will write to affected members to give them more information.103 There are some FAQs on the website.

On 13 November 2017, Pensions Minister Guy Opperman said that how to deal with such decisions was a matter for the trustees:

Nic Dakin (Scunthorpe) (Lab): Members of the British Steel pension scheme need to decide whether to go into British Steel pension scheme 2 or the Pension Protection Fund by 11 December, but there is still a lack of clarity around the position of high/low pensioners in the PPF and whether that might change after the point of decision making. Will the Secretary of State look at this so that the information is available to people before they make that decision?

Guy Opperman: I acknowledge the issue that the hon. Gentleman sets out. If he writes to me, I will sit down with him and go through it in more detail. Clearly it is a matter for the trustees on an ongoing basis as to what particular decisions are taken.104

Transfers Scheme members with more than a year to go until normal pension age usually 65 have a statutory right to a transfer value (with a requirement to seek advice if their benefits are worth more than £30,000).105

There are concerns that scheme members were being targeted by pension transfer advisers, encouraging them to transfer their pension rights to riskier arrangements with higher charges.106 On 20 November 2017, Pensions Minister Guy Opperman explained that the FCA was arranging to meet firms of advisers to explain its expectations:

99 Ibid 100 Ibid 101 DWP, Draft regulations to allow the Pension Protection Fund to take account of

bridging pensions. Public consultation, August 2017, p9 102 http://bspensionschoose.com/faq.html 103 Ibid 104 HC Deb 13 November 2017 c22 105 www.bspensionschoose.com; Pension Schemes Act 1993, s93-102 106 ‘Port Talbot steel workers allegedly targeted by pension sharks’, Financial Times, 16

November 2017

30 Occupational pension increases

The Trustee of the British Steel Pension Scheme (BSPS) is providing information to members on the effect on their pension rights of either staying in the original scheme which will move in to the Pension Protection Fund (PPF) or transferring to the new scheme. This includes newsletters, a website, bespoke option packs and access to free and impartial helplines. The Trustee cannot provide financial advice but members who may want independent advice are signposted to the www.unbiased.co.uk website. They are also warned to check that the Independent Financial Advisor from whom they receive advice is authorised by the FCA to advise on defined benefit pensions by looking them up on FCA’s register. The BSPS trustee is also warning members about the risk of bad advice and scams in its communication with members.

The Department does not provide formal advice to any pension scheme members. The Department is not authorised to provide financial advice. However, the free service provided by the Pensions Advisory Service may be able to clarify or explain information that members have received from their scheme to help them better understand their options.

The Pensions Regulator has encouraged the BSPS trustee to repeat the warnings to members at the ongoing road show meetings it is holding with members to ensure they are fully informed about their options. The PPF has been invited to these roadshows to answer questions and provide information on how the PPF operates. The Secretary of State has not had any discussions with the PPF regarding the number of BSPS members requesting transfer valuations since this is a matter for the Trustee rather than the PPF or the Government.

Government is in ongoing discussion with the FCA on the issue of cold calling and wider issues concerning advice. These discussions will take account of the circumstances surrounding Tata Steel. The Financial Conduct Authority (FCA) is aware of concerns around this issue and is urgently arranging to meet the firms in Swansea that hold the permission to advise on pension transfers in order to set out their expectations of advisers. The FCA can use their supervisory tools where they suspect authorised firms of being involved in pension scams. These tools include restrictions on a firm’s permission to do certain types of business. When unauthorised firms carry on regulated pension business, the FCA has the power to investigate and take action through the criminal and civil courts.107

The FCA held seminars (two in South Wales and two in Doncaster) aimed at regulated pension transfer advisers, which around 200 local regulated advisers attended. It also wrote to all regulated advisers in the local areas to reaffirm its expectations of them. It said:

We have clear rules and requirements of regulated advisers providing advice on pension transfers are we are taking action now to ensure firms are aware of their obligations.108

It outlined the steps it was taking to improve advice in this area in a letter to chair of the Work and Pensions Committee, Frank Field:

We have been made aware of reports that some regulated advisers have been targeting BSPS members and providing poor

107 PQ 113177, 20 November 2017 108 Letter from the FCA to Rt Hon Frank Field, chair of the Work and Pensions Select

Committee, 29 November 2017

31 Commons Library Briefing, 8 December 2017

advice on transferring from their defined benefit scheme into a defined contribution scheme or other investment. As such, we have sought to intervene to remind all regulated advisers of our clear and firm expectations of them by holding seminars and writing to any regulated pension transfer advisers in the affected areas. We are taking these steps to mitigate any potential harm.

Advice on defined benefit to defined contribution transfers remains a priority for the FCA; as it has done for the last few years. We have identified firms who are particularly active in this area and have requested details of their business models. We have also visited 16 firms to review their client files. Where we found failings in the advice provided we have taken action, including asking firms to stop providing further advice until they make changes to their business models. I addition to this, we have also issued a number of alerts to advisers and we are consulting on new rules for advisers who provide advice on pension transfers. We have also continued our work on scams, particularly those that target consumers’ pensions.109

The Committee asked whether the FCA had any evidence on whether, of the approximately 1,700 members of the BSPS who had opted to transfer their benefits, any had been subject to mis-selling by advisers, the FCA said it was working with firms known to have advised BSPS members and would “review files to check the advice provided is suitable and meets the client’s aims and objectives.” Where it found firms had provided unsuitable advice, it would “consider the most appropriate intervention which may include requiring firms to provide redress to clients where they have suffered financial loss.” Its work with individual firms was confidential. However, it was able to confirm that:

[…] a number of firms have (publicly) restricted their regulator permissions to provide pensions advice (called a VREQ or voluntary requirement) most recently Active Wealth (UK) Limited. VREQs are published against a firm’s entry on our publicly available Financial Services Register: https://register.fca.org.uk

The Pensions Advisory Service had set up a dedicated phone number for BSPS members to call for free, impartial guidance.110

Buddy block transfers In a letter to TPR of 5 September, Frank Field also raised the issue of “buddy” block transfers:

It has come to my attention that the BSPS is refusing to organise “buddy” block transfers, whereby two or more members effect a joint transfer simultaneously. I understand that such an option could allow scheme members who joined the scheme before 2006 to transfer out while retaining their ‘protected pension age’, which gives them access to benefits from age 50, but that BSPS has rules out this option on grounds of administrative complexity.111

TPR responded that the administrative work involved had to be “balanced against the significant administration work currently being undertaken to ensure members receive full and timely information to

109 Ibid 110 Ibid 111 Letter to TPR, 5 September 2017

32 Occupational pension increases

enable them to make fully informed choices regarding their future retirement plans.”112

The BSPS Trustees have provided a statement as to their position:

Effecting a block transfer is not simple and places significant additional requirements on the transferring scheme. In the present circumstances, the Trustee takes the view that making the significant changes to systems and processes that would be required to enable buddy transfers, and taking account of the volume of transfer requests that the Scheme is having to process, cannot be justified and would be to the detriment of members generally.

Where individual scheme members exercise their statutory rights to cash equivalent transfer payments, the duty of the Trustee is to give effect to the statutory transfer rights in accordance with statutory requirements. The Trustee will continue to focus on ensuring it efficiently carriers out this statutory obligation for those members who decide that a transfer of Scheme benefits best suits their individual circumstances.113

112 Letter from TPR to chair of WPC, 12 September 2017 113 BSPS Trustees – statement to scheme members, 18 September 2017

33 Commons Library Briefing, 8 December 2017

4. Revaluation of deferred pension rights

There are also requirements on schemes to revalue the preserved pension rights of people who have left the scheme (for example, because they have moved jobs) before pension age.

Before 1975, those who left their jobs before their scheme’s normal retirement age were significantly disadvantaged compared with those who stayed. In particular, they generally had no statutory rights to preserved benefits, or to receive back the contributions that they had paid into an occupational pension scheme. In practice many schemes did give members a right to a refund of their contributions but in some schemes, early leavers ended up with nothing. The Social Security Act 1973 introduced for the first time, for those who left after April 1975, a right to a deferred pension. This was initially restricted to those who were over the age of 25 and had completed at least five years’ pensionable service. The age requirement was subsequently removed by the Social Security Act 1985, taking effect from 1 January 1986, and the five-year period was reduced to two years from 6 April 1988 by section 10 of the Social Security Act 1986.

Revaluation of deferred pensions has been required in some form since 1986.114 The purpose was to protect those who changed jobs during their career. The then Secretary of State for Social Services, Norman Fowler said:

At present many people who change their jobs leave behind a pension, which is basically frozen in cash terms and, therefore, loses value up to the age of retirement. That provides the most fundamental complaint about the present arrangements. I shall therefore introduce legislation to require occupational pension schemes to revalue deferred benefits for future early leavers at 5 per cent a year compound or in line with prices, whichever is less, over the whole period from leaving to pension age.115

The Pension Law Review Committee, chaired by Professor Roy Goode, considered whether those who left early (and therefore become deferred members) should be in the same position as those who stay for the same period of service, or whether “some other way could be found to at least maintain the real value of the pension.”116 It looked at whether deferred pensions should be revalued in line with earnings but recommended that they should continue to be revalued by prices, capped at 5%.117

114 Lewin and Sweeney, Deregulatory Review of Private Pensions. A Consultation Paper, March, p12; Pension Schemes Act 1993, Part IV 115 HC Deb, 11 June 1984, cc642-3 116 Pension Law Reform. The report of the Pension Law Review Committee, volume 1, p

24 117 Ibid, para 4.7.17

34 Occupational pension increases

Deregulatory review Chris Lewin and Ed Sweeney were asked to consider whether the cap on mandatory revaluation should be reduced to 2.5% for service going forward. They found arguments on both sides:

80. Those who think that there should be a reduction in the cap believe that it makes no sense to cap increases to pensions in payment at 2.5% while allowing increases to pensions in deferment, which for most schemes relate to ex-employees, to remain capped at 5%. Surely, these stakeholders argue, the leavers should not be rewarded more than the stayers. Others reply that this last argument misses the point - revaluation is designed to preserve parity between leavers and stayers, rather than as between leavers and pensioners. 118

They did not recommend a reduction in the cap:

We have seen no evidence that this change would ease administration, encourage risk sharing or slow closure of final salary schemes. Although available data is patchy, it seems to us that women could be disproportionately affected by a reduction in the cap, because they are more likely to earn pension benefits early in their careers and then leave the workforce for periods of time to undertake caring responsibilities.119

However, they did say that they would “understand if Government took the view that, when looking at the package as a whole, a reduction in the cap from 5% to 2.5% was one of the measures needed” to encourage provision.120

The Labour Government consulted on the issue and found that the proposal to reduce the cap had been “generally welcomed by organisations representing employers and pensions industry”, although most also cautioned against any expectation that, alone, it could have a significant impact on employers’ decisions to continue with DB schemes. Most organisations representing scheme members “were strongly opposed to any change to the cap.” The Government decided to reduce it to 2.5%:

Taking all of the representations, for and against, into account, the Government has decided to proceed with this proposal, and to reduce the level of the cap going forwards to 2.5%, in line with the original policy intention to provide a degree of, but not total, protection against the effects of inflation. It believes that this achieves a balance between encouraging good employer provision while sufficiently protecting members’ interests, and a relevant provision will be included in the forthcoming Pensions Bill. 121

Section 101 and Schedule 2 of the Pensions Act 2008 reduced the cap on the required revaluation of deferred pension benefits, for future accruals from 6 April 2009:

118 Lewin and Sweeney, Deregulatory Review of Private Pensions, An independent

report to the Department for Work and Pensions, July 2007 119 Ibid, para 81 120 Ibid, Executive Summary, para 5 121 DWP, Deregulatory review – Government response to consultation, December 2007,

p4-5

35 Commons Library Briefing, 8 December 2017

The overall effect of the amendments is to provide that accrued benefit attributable to pensionable service on or after the commencement day is to be revalued by the rate of inflation over the relevant revaluation period, capped at 2.5% per annum. Accrued benefit attributable to service before the commencement day is to be unaffected by the amendments and a cap of 5% per annum is to continue to be applied to accrued benefits for service between 1985 and the commencement day. Where the time period between the end of pensionable service and the beginning of pension payments is longer than a year, the caps are applied to the rate of inflation as averaged over that time, and are calculated on a compound basis.122

122 Pensions Act 2008 – Explanatory Notes; Pensions Act 2008 (Commencement No 2

Order) 2009 (SI 2009/82)

BRIEFING PAPER Number CBP-05656 8 December 2017

About the Library The House of Commons Library research service provides MPs and their staff with the impartial briefing and evidence base they need to do their work in scrutinising Government, proposing legislation, and supporting constituents.

As well as providing MPs with a confidential service we publish open briefing papers, which are available on the Parliament website.

Every effort is made to ensure that the information contained in these publicly available research briefings is correct at the time of publication. Readers should be aware however that briefings are not necessarily updated or otherwise amended to reflect subsequent changes.

If you have any comments on our briefings please email papers@parliament.uk. Authors are available to discuss the content of this briefing only with Members and their staff.

If you have any general questions about the work of the House of Commons you can email hcenquiries@parliament.uk.

Disclaimer This information is provided to Members of Parliament in support of their parliamentary duties. It is a general briefing only and should not be relied on as a substitute for specific advice. The House of Commons or the author(s) shall not be liable for any errors or omissions, or for any loss or damage of any kind arising from its use, and may remove, vary or amend any information at any time without prior notice.

The House of Commons accepts no responsibility for any references or links to, or the content of, information maintained by third parties. This information is provided subject to the conditions of the Open Parliament Licence.