DB schemes could exchange inflation protection for income boosts

Defined benefit (DB) pension schemes should consider offering members the choice to replace inflation protections with a pension increase exchange (PIE), according to LCP.

The firm explained that these exchanges see members agreeing to have their pension income front-loaded and therefore higher when they are more likely to be active with their income, as opposed to enjoying the benefits of non-statutory inflation protections.

While this is potentially advantageous to members as it allows them more income when they might enjoy it more, LCP pointed out that restructuring benefits in this manner was also attractive to schemes as it could leave them “less exposed to inflation risks”.

It added that, while PIEs do already exist, increased clarity on the issue of guaranteed minimum pension (GMP) equalisation stemming from recent Pensions Administration Standards Association (Pasa) guidance had made them particularly attractive to DB schemes.

Additionally, LCP argued that projected increases to inflation and changes to the Retail Prices Index meant it could be a particularly attractive time for schemes to explore the possibility of offering members PIEs, calling the option a potential “win-win” for both schemes and members.

It should be noted that statutory inflation protections, such as protection against inflation of up to 2.5 per cent that members have for service since April 2005, should not be removed in exchange for a pension income increase.

LCP partner, Clive Harrison, said: “Given the trend on inflation, and recent helpful guidance on GMP conversion, I expect to see more trustees and scheme sponsors introduce a PIE option as they continue to de-risk whilst at the same time provide an attractive option to members.

“With some of the barriers now removed, the time is right for schemes to consider whether this would be right for them and their members, potentially as part of a wider process of GMP equalisation.”

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