The Pensions Act 1990 (the "Act") provides the right to a ‘preserved benefit’ for pension scheme members leaving their employment where they have fulfilled the qualifying service period requirement (generally 2 years). Since 1991, provision was included in the Act for the revaluation of a preserved benefit payable under a defined benefit (DB) scheme by the percentage increase in the Consumer Price Index (CPI) subject to a maximum increase of 4%. This was designed as an inflation protection measure to maintain the value of member benefits.
However, the Act did not originally foresee negative inflation. In 2012 the wording of Section 33 of the Act was amended to allow for a downward adjustment, by referring to the increase “or decrease” in CPI. This applied after 1 January 2013. In April of this year regulations were introduced to specify a negative revaluation of -0.3% for the 12 months to 31 December 2015. This is the first time the revaluation percentage has been negative.
It should not be assumed that a negative revaluation of -0.3% can be applied to preserved benefits for 2015 in every scheme. Some scheme rules may have been drafted before the possibility of a downward adjustment was envisaged, and the rules of a DB scheme can apply a higher benefit. In such cases an appropriate rule amendment may be required to apply a revaluation decrease in future. Both trustees and employers should consider seeking advice on the interpretation of the revaluation provisions in their scheme.