Pension revaluation and increases in deflationary times

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

The statutory revaluation order which comes into effect on 1 January 2016 is based on a CPI figure for the year to 30 September 2015 of -0.1 per cent.

Revaluation is applied, in defined benefit (DB) schemes, to a deferred pension for complete years between leaving pensionable service and the scheme's normal pension age. The actual percentage applied to each member's benefits will depend on the length of the period of deferment – with the percentage increase applicable to each year being CPI (capped at five per cent for benefits attributable to periods of pensionable service before 6 April 2009 and 2.5 per cent thereafter). Those retiring in 2016 with only one year of deferment will get nil revaluation, rather than a reduction. However, the -0.1 per cent figure will be factored into longer periods of deferment meaning a benefit statement issued in 2016 could have a lower pension figure than one issued in 2015. This could cause confusion to members (as they would not expect DB benefit illustrations to reduce).

Different rules apply to the revaluation of GMPs. They are revalued either in line with earnings or at a fixed rate.

Pensions increases for DB benefits are based on the same figures and so pensioners in schemes providing increases only at the statutory minimum level could see a benefit freeze next year.