Why are my salary pension increases so low? ( Choice is a consumer magazine)
in Choice that the government has proposed restricting
final salary pension increases to 2.5 per cent per annum, down from the current maximum of 5 per cent. I am 70 and have received my State pension for the last five years. The pension fund administrators write to me every year informing me of the increase for the following year. Last year I had a letter
stating an increase of 4.4 per cent would apply
from April 1 2007, but when I received the first payment the gross increase was just 2.23 per cent. When I contacted the administrators they
explained in jargon
I could not understand that the payment made was related to the guaranteed minimum pension and the State is responsible for the rest of
I obtained the Pension Service booklet NP46, but I still don't understand how this works and I have now written to the Pension Service seeking a comprehensible explanation.
During the past five years letters from my pension fund
administrators have shown increases than are consistently several percentage points higher
than the actual increases
I have received. The cumulative total 'on paper' is
15.8 per cent, whereas the actual
amount I have received is
7.99 per cent. Apart from the annual cost-of-living rise, the only increase to my State pension over the same period has been an extra 59p
on my Graduated Pension. Could you explain in simple terms why this is?
situation you describe is one of the most complicated
aspects of final salary pension schemes and – as you have already experienced – it can be very difficult to reach a conclusion.
It would seem your pension
includes some element of Guaranteed Minimum Pension (GMP) liability from a `contracted out' scheme – ie the scheme was `contracted out' of the State second pension (what was SERPS) and is therefore responsible for an element of the indexation of this benefit. This will be affected by your employment
history and other factors.
Consequently, as only part
of the increased responsibility for indexation falls to the scheme trustees, the
rest of it falls to the State and this will have the net result of reducing what the scheme actually pays. The remainder
should be taken up by the State. You question whether or not this has actually happened. It may be that the increases are
not actually shown as increases on your pension statements, but included with
The best way forward is to
write to the administrators of the scheme and ask them specifically how much of your
pension is GMP liability, how much is paid by the scheme and how much should fall
to the State? Should you then be unclear as to whether the State is actually paying these benefits, write to the Pension Service
again, asking them this specific question.
Dave Medler added ""that the above is really a surface scratching answer that partially
applies to Chevron retirees. The reality is somewhat more confusing, and then Chevron also throw discretionary increases into
the mix which make things even more complicated.
I am trying to remember how many
different bits of a pension there are and what carries a mandatory increase. You have pre and post 88 GMP, which is only split
out and increased after a person has attained age 65. Increases to Pre88 GMP are the responsibility of the State, whilst post
88 GMP is increased by the Pension Plan each April in line with RPI but capped at 3%. If RPI runs above 3%, then I believe
that increases in excess of this amount are again the responsibility of the State.
GMP accrual ceased April 1997,
and new legislation was introduced that required Schemes to increase all pension accrued after April 1997, once in payment,
in line with RPI, but capped at 5%. As you will be aware, this impacted heavily on Chevron and Texaco. Subsequant changes
have reduced this to RPI capped at 2.5% for pension accrued post April 2005.
I think that just about covers