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Defined benefit occupational pensions

This article explains the revaluation and escalation requirements that apply to Occupational pension scheme benefits.

Preservation came into effect on 6 April 1975, at that time in order to qualify for a preserved benefit you had to be over age 26 and have at least five years qualifying service. Prior to April 1975 most leavers just received a refund of their own contributions.

Subsequent legislation removed the age requirement and reduced the period from five to two years qualifying service. To prevent the value of preserved benefits falling in real value over time, revaluation of preserved pension benefits was introduced by the Social Security Act 1985 and has been modified over time so that the current position is as detailed below:

Defined Benefit Schemes

Revaluation of deferred pension

Guaranteed minimum pension (GMP)

Must be revalued from the date the member ceases to be contracted out until their State Pension Age. There are three different methods that can be used – Fixed, Section 148 Orders and Limited revaluation. Limited revaluation only applies if a member left service before 6 April 1997.

Fixed Rate

Leavers

% pa

6/4/78 – 5/4/88

8.50%

6/4/88 – 5/4/93

7.50%

6/4/93 – 5/4/97

7.00%

6/4/97 – 5/4/02

6.25%

6/4/02 – 5/4/07

4.50%

6/4/07 – 5/4/12

4.00%

6/4/12 – 5/4/17

4.75%

Section 148 Orders

Schemes that opt to increase their GMPs annually in line with Section 148 Orders (previously known as s.21 Orders), base increases on the increase in National Average Earnings Index each year.

Limited Revaluation

Limited revaluation is based on the increase in the National Average Earnings Index each year, limited to 5.00% pa.

Excess over GMP

Dependent on the date of leaving service.

Leavers

%

Prior to 1/1/86

No statutory requirement to revalue excess

1/1/86 – 31/12/90

Stat. min of Limited Price Indexation (LPI) (Consumer Prices Index (CPI)* max 5.00% pa) for each complete year in deferment for pension accrued from 1/1/85

From 01/01/91

Stat. min of LPI (CPI* max 5.00% pa**) for each complete year of total excess pension accrued

The statutory minimum increase each year is notified in the Occupational Pensions (Revaluation) Order (SI:2008/3070) AKA s.52a orders. A list of revaluation periods and their associated factors is given. Each revaluation period begins on 1 January and ends on 31 December prior to the order coming into effect. For example, a member who left on 1 July 1996 and retired on 1 September 2009 will have 13 complete years, making 1 January 1996 to 31 December 2008 the relevant revaluation period.

*The Pensions Act 2011 changed the statutory minimum from Retail Prices Index (RPI) to CPI with effect from 6 April 2011 for revaluation after that date.
** The Pensions Act 2008 provides that benefits accrued from 6 April 2009 are to be revalued with a cap of 2.50% per annum rather than LPI 5.00%.

The pension scheme may offer a more favourable revaluation rate than the statutory minimum.

Escalation of pensions in payment

GMP

Dependent on the period GMP accrued.

  • GMP accrued up to 5/4/1988 – level in payment. However, effectively they are increased in line with RPI and paid by the State by adding it to the Basic State Retirement Pension.
  • GMP accrued from 6/4/1988 onwards – GMP increases in line with RPI, max 3.00% pa. DWP pays any excess of RPI over 3.00%.

Excess over GMP

There is no minimum pension increase required for pensions based on benefits accrued pre-6 April 1997. Although the scheme may offer either guaranteed or discretionary increases.

Generally, pensions in payment must increase by LPI attributable to post-5/4/97 pensionable service.

LPI amounts to the lower of 5.00% pa and the increase in CPI specified in the most recent Revaluation Order (which is published each December and comes into force on 1 January).

The Pensions Act 2004 amended this requirement so that the LPI ceiling for the portion of the pension attributable to post-6/4/05 pensionable service is reduced to 2.50%. The portion of pension attributable to pre-6/4/05 service must continue to provide up to a limit of 5.00% pa.

The pension scheme may offer more favourable escalation rates.

Defined Contribution

Revaluation

Statutory revaluation does not apply to Money Purchase arrangements.

Indexation

For pensions that came into payment after the 5 April 2005, the Pensions Act 2004 removed the requirement for indexation of the pension for Defined Contribution schemes.

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