Maximizing Your Retirement: The Triple Lock Approach to Company Pension Schemes


As you are aware, the pension you currently receive is a ‘defined benefit’ or salary-related pension. These high-quality pensions were primarily available to those who worked for larger companies and could be considered a “perk” similar to a company vehicle or subsidized canteen. The crucial issue is that companies were not required to offer such pensions. This means that, with one significant exception, there is a limit to the extent to which the government can now compel employers to offer more generous schemes.

The primary exception to this is where company pensions were offered on a “contracted out” basis, i.e. to supplant a portion of the state pension that the employee would have otherwise accrued. In this situation, the government can impose certain regulations regarding the quality of your defined benefit pension. But where an employer (like yours) already provided a defined benefit pension, this could have resulted in ‘double provision’ – the accumulation of both a SERPS pension and a company pension.

To prevent this, company pension plans were permitted to “opt out” of SERPS. This allowed the company (and you as an employee) to pay a lower rate of National Insurance contributions. In exchange, the defined benefit pension had to be equivalent to the SERPS pension you would have accrued otherwise. Initially, however, the requirements for contracted-out plans to provide you with inflation protection in retirement were quite minimal.

All of this illustrates that the legal requirements for pension plans to increase your retirement income in accordance with inflation are complex and restricted. This means that during periods of particularly high inflation, members of defined benefit plans may receive an increase below the rate of inflation. Importantly, the pension scheme will have been funded for decades according to these principles. It would be extremely unfair for the employer to announce that, due to a change in government policy regarding the minimum state pension, the company pension scheme must now pay everyone an additional 10% for the remainder of their retirement.

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Opting Out of Discretionary Increases in Pension Schemes: Employer Perspectives and Financial Considerations

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Pension schemes may, if they so choose, pay increases in excess of those mandated by the scheme’s rules and the law governing contracting out. These are referred to as ‘discretionary’ increases. If a plan declines to pay discretionary increases, it does not necessarily indicate that the sponsoring employer is in financial trouble. It could imply, for instance, that the company believes that the defined benefit members have had relatively high-quality pension provision (for which they have only paid a fraction of the cost) and that they would prefer to spend that money on younger employees or on investing in the business.

Regarding your point regarding the transition from the RPI measure of inflation to the CPI measure, it is true that CPI inflation is generally lower than RPI inflation, and this will have resulted in cost savings for the schemes. Consequently, there is a combination of factors at play, some of which improve the position of pension schemes and some of which deteriorate the position of pension schemes, so you cannot simply point to one change and assert that you should receive a larger increase.

If you had not yet begun receiving your pension, a transfer would typically be an option. However, it is fair to say that regulators believe that for the majority of individuals, staying in the defined benefit world with its greater level of certainty is a safer bet than transferring the value of their pension into a defined contribution pot of money world and assuming all the risk themselves.

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Source: This is Money

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