Several large multinational corporations, including Hewlett Packard, American Express and Pfizer, are facing criticism for not increasing the pensions of UK employees who accrued benefits before 1997.
Thousands of former employees are reliant on UK companies granting discretionary increases to keep pace with inflation. Some multinational companies have repeatedly chosen not to provide these discretionary increases, even while making substantial profits, causing a significant erosion in the real value of these pensions.
Which companies are being criticised for not increasing pre-1997 pensions?
Several multinational companies are under scrutiny for their failure to provide inflationary increases to pre-1997 pension payouts. These include Hewlett Packard (HP), American Express, Pfizer, and 3M. These companies are being criticised especially as they are seen to be profitable enough to afford these increases.
What are the consequences for pensioners when companies don’t increase their pre-1997 payouts?
The consequences can be severe for pensioners. With inflation rising and no corresponding increases to their pensions, the real value of their pensions decreases significantly over time. In practice, this means they have less purchasing power and face financial uncertainty in retirement. Some pensioners have seen the buying power of their pensions drop by 20% in just five years. They may be forced to cut back on essentials, which contrasts greatly with the pension plans they were initially promised.
25% of all benefits accrued before 1997 are not protected
Figures from the Pension Protection Fund indicate that approximately one in four pre-1997 pension schemes do not have any mandatory rules to increase payouts in line with inflation. This demonstrates that it is a considerable problem affecting many pensioners, and it is not an isolated or minor issue.
What are the options for those with UK company pensions who want to take control of their pension pots?
Transferring to a Self-Invested Personal Pension (SIPP): Transferring a company DB scheme to a SIPP is a complex decision that requires assistance from a UK qualified financial advisor. It means exchanging the guaranteed income of a DB scheme for the control, growth and flexibility of a SIPP. It is especially applicable to those living overseas who may prefer the ease of access, currency variation and potential tax benefits of a SIPP.
Investment returns vs. Inflation: Generally, with a smart investment portfolio, diversified and tailored to your risk profile, investments in a SIPP outpace the sometimes mandatory inflationary increases from defined benefit company pensions.
What’s the UK Government doing?
The government’s Department for Work and Pensions states that their priority is to ensure companies meet their pension promises and that they are working with the Pension Regulator to identify issues. However, they also need to balance this with ensuring pension schemes don’t become unaffordable.
The Pensions Regulator clarifies that minimum indexation requirements are set by legislation but that discretion in this area depends on each scheme’s rules. They indicate that any new legislation would be a matter for the government to introduce. Both organisations seem to acknowledge the issue but avoid giving a firm position on fixing it, leaving the situation still needing resolution.
