The Pensions Act 2008 includes a provision to reduce the cap on the rate of statutory revaluation of deferred defined benefit pensions from 5% to 2.5% per annum.
The proposed change was intended to take effect from January 2009 but it has been announced that the intended implementation date has been postponed until 6 April 2009. When the legislation comes into effect, it will mean that deferred pensions in defined benefit schemes will be revalued until they come into payment according to the rate of inflation, but capped at 2.5% instead of the current cap of 5%. The new lower cap will only apply to benefits accrued after the date of implementation. Benefits already accrued will be unaffected by the change.
Whether action is required by trustees and employers to take advantage of the reduced rate will depend on the wording of their scheme rules.
If a scheme's rules make direct reference to the relevant provisions of the Pension Schemes Act, then the new change should be automatically incorporated. If, however, a scheme's rules refer to a specific rate of revaluation, the trustees and employers may need to take action to amend the rules if they wish to incorporate the change.
The change in the revaluation cap is not mandatory, but, as mentioned above, may be automatic. This means that trustees and employers should agree on the level of revaluation they wish to provide. In deciding whether to adopt the change, employers and trustees should seek actuarial advice in order to assess any potential savings for the scheme. They should also inform their scheme administrator of their decision to ensure that the proper benefits are recorded and provided.
Schemes will be permitted to keep the current 5% cap if they wish. If that is to be done, the scheme rules should be checked to make sure that the change will not be automatically incorporated.
Any change to the scheme rules must not adversely affect past benefits that have accrued within the scheme. Trustees and employers considering an amendment to their scheme must also be aware of the relevant pension consultation regulations (The Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006). Under those regulations, employers are required to engage in consultation before a "listed change" is made to future benefits.
Changes to be made to the revaluation basis may be caught by the consultation regulations, and it is important that trustees and employers considering any amendment seek legal advice in order to protect themselves and to ensure that any amendments are effectively made.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
