The vast majority of defined benefit (DB) pension schemes are offering below-inflation increases, with more than two thirds (68 per cent) providing inflationary increases that are typically capped at 5 per cent for post-1997 benefits, research from Broadstone has found.

The research found that just under one in ten (9 per cent) of schemes provide uncapped inflationary indexation increases to benefits accrued before 5 April 1997, while the same proportion of schemes are providing uncapped inflation increases for post-1997 benefits.

In contrast, more than two-thirds (68 per cent) of schemes provided inflation increases either via the Consumer Price Index (CPI) or the Retail Price Index (RPI) that, for the vast majority, are typically capped at 5 per cent for post-1997 benefits.

Furthermore, for benefits accrued before 1997, 31 per cent of schemes have capped inflationary increases and a similar proportion (32 per cent) have fixed increases, while just one in five schemes (21 per cent) do not have any indexation on these scheme benefits.

“Soaring inflation has once more brought the topic of DB indexation back into the spotlight," Broadstone head of policy, David Brooks, stated.

“It is clear that the majority of schemes will be uprating member benefits below the September rate of inflation given the prevalence of 5 per cent caps. It is important that members are aware of how their benefits will be impacted in April so they can budget accordingly and don’t receive any nasty surprises."

However, whilst Broadstone acknowledged that capped increases are typically in line with scheme promises made and overall benefits are now much more secure for most, it admitted that there is a financial strain on pensioners.

Indeed, Brooks pointed out that the timing has also made this issue more complicated for schemes and trustees, as the cost-of-living crisis has coincided with significant funding improvements for DB schemes leading to calls for discretionary increases for member benefits.

“Members believe that due to the improvement in funding levels, pension schemes could reasonably afford to grant a one-off uprating to help payments keep pace with inflation at a difficult time for household budgets," he continued.

“However, members need to appreciate that ‘heads I win, tails you lose’ has put large strains on employers to invest in these pension schemes over many years – more than they probably ever anticipated.

“Providing greater than agreed increases is not something that employers should be compelled to do although we understand the pensions minister is mulling on this area.

"Other than introducing some upside sharing for the distribution of a funding surplus from the recent consultation, it is unlikely there will be a legal way to help members.”

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