Unite has thrown its weight behind defined benefit pensioners lobbying the government to introduce pre-1997 indexation in the Pension Protection Fund through the pension schemes bill, as new modelling by the PPF suggests the cost of inflation-linking has reduced. Some MPs have proposed a new clause that would inflation-link pre-97 benefits in both the PPF and the Financial Assistance Scheme. 

In its submission to the Public Bills Committee, union Unite highlights the £14.1bn reserve in the £32.2bn PPF, writing that “a small portion of this, £3.2bn to £3.9bn could fix a gross unfairness in the compensation rules that penalises people who saved into their pensions before 1997, by making Retrospective indexation plus arrears”. 

The union which is Labour’s biggest donor says such a change would benefit up to 400,000 pensioners at no cost to the exchequer, arguing that “there would still be enough assets to ensure compensation levels were safe, and employers benefitted from elimination of the levy”. 

Unite wants to see the pension schemes bill amended so it provides for:

In addition, the union will advocate for higher pensions for dependants than the current 50%, “towards a level more closely aligned with established occupational schemes such as the Local Government Pension Scheme”.  

Unite added that members of the Financial Assistance Scheme “deserve fair, inflation-protected pension compensation”.  

FAS compensates members of underfunded schemes whose employers became insolvent before the PPF started operating in April 2005. Pensions paid to the 130,000 members of the FAS are funded through the Department for Work and Pensions, rather than an industry levy like the PPF. 

Apart from Unite, about 20 individuals – including several former trustees – and pensioner associations have also submitted evidence either on pre-97 indexation in the PPF or in relation to pre-97 benefits of ongoing schemes. The Deprived Pensioners Association argued that paying retrospective indexation plus arrears would leave the PPF funding ratio at 138%, “well above the level at which PPF began its sequence of levy reductions”. The PPF is currently 178% funded. 

The PPF reserves are required to help support any future insolvencies requiring a scheme within the UK’s £1tn DB universe to be bailed out and allows the PPF to reduce its industry levy to zero.

Giving evidence to the Public Bills Committee, PPF chief executive Michelle Ostermann said the PPF has done its best to estimate the impact of different scenarios, which range in price. It has included updated figures for the different options in an email to the chair of the Work and Pensions Committee.  

Ostermann said these options are “not cheap” and would be difficult for PPF and government to be able to afford, with implications for taxpayers depending on how the payments are designed.   

However, the cost of indexing is lower than previously estimated. The cost of providing retrospective PPF uplifts has come down to £3.9bn from £5.5bn, while the prospective uplifts cost has reduced to £1.2bn from £1.9bn. There has been "little change" in the estimates for FAS. 

However, a decrease in yields of 1 percentage point would lead to an increase in PPF liabilities of 12.1%. 

Any change around pre-97 benefits would require primary legislation. Plaid Cymru and SNP MPs have tabled a new clause that would make indexation of PPF and FAS compensation applicable to both pre-1997 and post-1997 service.  

Given legislation is required, the PPF itself cannot make the change. “It is not within our prerogative, that decision, but we have been facilitating it, encouraging it, and we would welcome progress on that,” said Ostermann.   

In its written submission, the lifeboat similarly said: “Given the PPF’s financial strength, we think it’s the right time to consider the levels of indexation we pay our members.”  

However, the PPF highlights that its assets and liabilities are captured by the government’s ‘public sector net financial liabilities’ methodology for assessing the public balance sheet under the Treasury’s fiscal rules. Indexing pre-97 accrual in the PPF and FAS could in theory impact the government’s ability to borrow, at a time when the chancellor is already struggling to balance the books.   

Others say the effect is minimal. PPF scheme member Con O’Neill believes that “granting pre-1997 indexation would only impact PSNFL to GDP metric by 0.1%. This ‘impact’ would be reversed in a couple of years by PPF’s own forecast growth in reserves.”  

He adds that there will be “no adverse impact on taxpayers either, just additional income tax and VAT receipts generated”.