On the go: Improved regulatory clarity and rising inflation rates could mean now is the time for DB pension schemes to consider offering a pension increase exchange to their members, according to LCP.
A PIE is a deal where the member trades inflation protection in the scheme rules that goes beyond legal minimum levels for a higher starting pension — the drawback being that payments remain flat as the price of goods increases.
Under current legislation, pensions built up in DB schemes carry statutory protection against inflation, but some pension schemes may offer inflation protection over and above the statutory minimum.
A common example would be where inflation protection applies to pre 1997 service as well as post 1997 service, or where inflation is linked to the retail price index rather than the consumer price index — a rate typically higher.
Bur according to Clive Harrison, partner at LCP, recent developments have made PIEs more appealing.
New guidance from the Pensions Administration Standards Association has provided direction on how schemes can tackle guaranteed minimum pension equalisation by ‘conversion’ of scheme benefits.
This approach potentially increases the amount of benefits where inflation protection can be exchanged for a higher starting pension, and allows schemes to conduct GMP conversion and a PIE as a single process.
Second, levels of inflation are now rising, which means the value of non-statutory indexation increases, allowing schemes to offer a larger rise in starting pensions in exchange for giving up this protection.
Third, uncertainty over changes to the RPI have meant it has been harder for schemes to predict the value of future pension increases and set PIE conversion terms. However, a final decision has now been announced on this matter, which allows schemes to plan with greater certainty.
Harrison says the current “window of opportunity” can be a “win-win” for both schemes and members.
He 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 derisk, 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.”
In 2018, the Sainsbury’s Pension Scheme gained £31m after conducting a PIE exercise, helping it overcome its deficit of £261m.
