Revaluing early leavers' benefits
14 November 2008
The statutory cap on the revaluation of deferred benefits is expected be reduced from 5% a year to 2.5% for service after 1 January 2009. Schemes may need to amend their rules before they can apply the lower ceiling.
The change is being made through the Pensions Bill and depends on Parliament passing the Bill into law in the next few weeks.
Generally speaking, the legislation about revaluing deferred benefits overrides scheme rules so that it applies regardless of what they say. But this is not the case where the scheme rules say that members will be treated more generously than the legislation requires.
If a scheme's rules say that cleavers' benefits will be indexed in accordance with prevailing statutory requirements from time to time, the new cap will apply from January.
But if the rules say explicitly that the scheme will index benefits in line with inflation up to a maximum of 5%, the scheme will have to continue to do that in relation to benefits earned after January. Unless, that is, it amends its rules to adopt the new cap.
In the current climate in particular most schemes will want to apply the new limit. All schemes should check their rules – and amend them if necessary – to be sure they can.
On the flip-side, schemes that make a positive decision to keep the higher ceiling should check whether their rules need to be amended to allow them to.
Some schemes may have restrictive amendment powers that make it difficult to take advantage of the lower cap. The government has been looking at creating statutory amendment powers to help them. It has not come up with concrete proposals yet, but there is hope that it might.