When individuals leave employment having participated in their employer’s defined benefit occupational pension scheme for at least two years (or five years in certain circumstances), one of the options available to them is to leave their accrued pension benefits in the scheme of their former employer as a deferred pension. The Pensions Act 1990 (as amended) (the “Pensions Act”) gives these individuals a statutory right to a minimum “preserved benefit”. Individuals may also become entitled to preserved benefits in a limited number of other circumstances, as set out in the Pensions Act. In order to prevent the value of the preserved benefit diminishing over time, through the effect of inflation, the preserved benefit is revalued annually in line with the Consumer Price Index (“CPI”).
The Pensions Act provides that the revaluation rate for any year shall be prescribed by the Minister for Social Protection. Due to a decrease in CPI in 2015, the Minister has prescribed, for the first time, a negative revaluation rate (of -0.3%).
Although, under the Pensions Act, revaluation of preserved benefits occurs automatically, depending on the rules of a particular scheme, there may be some uncertainty as to whether a rule amendment is required in order to reduce members’ deferred benefits (for example, many schemes provide only for deferred benefits to increase in line with the rate prescribed). We would therefore recommend that scheme trustees take appropriate advice before applying the revaluation rate prescribed for 2015.