Many retirees with Defined Benefit pension suffer real-terms hit

Half a million pensioners with ‘gold-plated’ pension schemes have seen their value fall in real terms, shocking new research shows.

Jealous of your friends and relatives who have Defined Benefit – so-called ‘Final Salary’ pensions?

Don’t be too envious.

Unfortunately, even these are not the solid gold bet they used to be.

In fact, some British pensioners who worked for years at major companies are in uproar over the falling value of their nest eggs in real terms.

Due to rising inflation, the cost of living has increased by more than 20% in recent years and, for at least half a million pensioners with company schemes, their pension income has remained static during that time.

Major international corporations, from BP to Wood Group, American Express and Hewlett Packard, have failed to increase them in line with inflation, meaning that in real terms retired employees’ packages are worth much less than they used to be.

Yet figures from the Pension Protection Fund (PPF), which takes over DB pension schemes if the companies go insolvent, show that - far from being in deficit - the UK’s 5,000 or more Defined Benefit pension funds recorded a £474 billion surplus in July this year.

Previously, under the 1995 Pensions Act, Final Salary schemes had to increase member income in line with retail price inflation, up to a maximum of 5%. However, this rule was slashed to just 2.5% in 2005.

BP’s Final Salary pension fund (BPPF), for example, was previously generous, with members’ pensions guaranteed to rise by retail price inflation on an annual basis, up to a limit of 5% - including those employee pension pots built up before 1997.  

However, in the past two years, the oil giant has turned down its pension scheme’s trustees’ requests to approve a rise of above 5% to protect pensioners from the ravages of inflation.

BP’s management said this was down to “a wide range of factors, including increases to the current cost of living, the funding position of the BPPF and the economic impact for BP.”

Yet the Government increased the State Pension by just over 10% last year. 

Pensioners are fighting back

Pensioners are fighting back, however. Last year BP pensioners formed a special group to protect its pension scheme and it is now lobbying for the oil giant to “restore the real value of the pension to the level of May 2021 with an 11% increase.

They say that members of the pension fund have lost 11% in the value of their pensions over the past two years “at a time when BP is making record profits.”

Its management have also been criticised for awarding themselves record pay packets.

The group, which has 3,000 members, says it wants BP and the pension trustee to “honour” the company’s 1992 policy of “increasing pensions in line with the cost of living wherever possible” and when the company has “sufficient resources” to do so.

It also wants the governance of the fund to be improved to “provide more pensioner input and eliminate sponsor conflicts of interest”, while any surplus assets left after the completion of a buy-out should be distributed between pension beneficiaries and BP “on a fair and equitable basis”.

An additional concern is the apparent admission by the BP Pension Fund trustee that it is in talks with insurance companies to enable them to buy-in to the fund.

The BP Pensioners Group fears that this is the first step in selling off BP’s pension funds to insurance firms.

Pension protests outside Hewlett Packard UK

Meanwhile, 5,000 UK pensioners of companies owned by Hewlett Packard have also been staging a revolt.

Members of the Hewlett Packard Pensioners Association (UK) (HPPA) say they have faced “significant hardship” over the past 20 years due to only their pre-1997 pension contributions being index-linked by law.

Last year retired employees of Digital Equipment Corporation, owned by the company following a series of acquisitions, staged a day of protest outside Hewlett Packard’s UK headquarters in Reading.

A spokesperson for Hewlett Packard previously said that the firm was “committed” to carrying out its responsibilities to current and former employees and it would give the matter “due and appropriate consideration.”

Recently, Central Ayrshire SNP MP, Philippa Whitford, also put her support behind an Early Day Motion, asking the House of Commons to note that more than half a million former employees of 3M, American Express, Hewlett Packard, Chevron and Wood Group have been hit by “massively-reduced pensions” and asking the Government to “put pressure” on the companies involved.

BP’s ‘moral bankruptcy’

Meanwhile, in a recent debate on the issue in May this year, Alistair Carmichael, Liberal Democrat MP (Orkney & Shetland), told the House of Commons he believed there appeared to be a “moral bankruptcy” at the heart of corporate BP when it came to its pensioners.

He also criticised its “zero-engagement policy” with the pensioners. BP has reportedly refused to meet with the group for more than a year.

It’s clear that these pensioners are not going to go away quietly.

Fortunately, the Department for Work and Pensions select committee also made positive noises earlier this year on the issue, recommending that the DWP and the Pensions Regulator “explore ways to ensure that scheme members' reasonable expectations for benefit enhancement are met.”

Let’s hope a good solution can be found as soon as possible.