A significant change in pension policy is set to benefit over a quarter of a million people across the UK. The Department for Work and Pensions has announced a major update affecting older defined benefit schemes, correcting what some have described as a long-standing oversight in how inflation has been applied to certain pension entitlements.
According to the Labour government, approximately 256,000 individuals will receive increased pension payments under the new measures. The change centres on pensions accrued before April 1997, benefits which, until now, were not subject to mandatory inflation protection.
Pre-1997 Pensions to Be Indexed for Inflation
According to the Department for Work and Pensions, pensions built up before 6 April 1997 within the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS) will now be linked to the Consumer Prices Index (CPI), capped at 2.5%. These new payments will apply prospectively, meaning they will affect future compensation rather than apply retroactively.
Torsten Bell, a minister at the DWP, confirmed the change during a government announcement, stating that it would correct an inconsistency stemming from pension rules introduced in 1997. At that time, indexation was mandated for defined benefit pensions, but only for those benefits earned from April of that year onwards.
The change is expected to impact approximately 165,000 members of the PPF and 91,000 current members of the FAS whose original pension schemes had included pre-1997 indexation provisions. According to Bell, “compensation payments from these schemes on pensions built up before 6 April 1997 will be CPI-linked,” ensuring fairer outcomes for members affected by inflation over time.
Figures from the Pensions Regulator, as cited by Bell, show that roughly 17% of private sector defined benefit scheme members still do not receive any inflationary uplift for pre-1997 benefits. The reform marks a step towards closing that gap, but only for those whose original schemes had provided for such increases.
Surplus Sharing and Discretionary Increases on the Horizon
In parallel with the indexation reform, the government is also progressing with broader changes to how pension surpluses are managed. Through the Pension Schemes Bill, trustees of well-funded defined benefit schemes will gain new powers to share scheme surpluses with employers. In doing so, the government aims to unlock a portion of the estimated £160 billion in total scheme surpluses across the UK.
Bell noted that such surplus-sharing agreements could also enable trustees to negotiate additional benefits for members, including discretionary indexation for those whose schemes did not originally offer pre-1997 inflation protection.
The Pensions Regulator is expected to issue further guidance on how trustees should approach surplus sharing once legislation is finalised. Bell emphasised that trustees are already encouraged to consider whether schemes have a history of awarding discretionary increases and whether members would benefit from such measures.
The current reform package, while limited to forward-looking payments, signals a broader policy direction that could see more equitable treatment of defined benefit savers in future. According to Bell, “Reforms in our Pension Schemes Bill will enable more trustees of well-funded defined benefit pension schemes to share surplus with employers, and deliver better outcomes for members, and benefit the wider economy.”
