Higher inflation and what this means for your pension
Inflation is now at its highest rate for three decades, and the Consumer Prices Index (CPI) and the Retail Price Index (RPI) both reflect this.
Why is this important?
Increases may be applied to your Prudential Staff Pension Scheme pension each year to help reduce the impact of inflation. In this article, we look at how your Scheme pension increases, as well as the effect of higher inflation on the Scheme’s overall funding levels, member’s options when they come to retire and transfer values.
The information in this article reflects the law as at the date of publication. Legislation governing pension increases has changed significantly over time and may change in the future.
How your State Pension increases is a separate topic, and one not covered by this article.
How your Scheme pension increases
Our Scheme Rules dictate what increases should be applied to your Scheme pension. Your entire pension is unlikely to increase at the same rate. Different rates apply depending on:
- The period of Pensionable Service over which you earned your pension; and
- Whether you are already receiving it.
Increases if you’re still building up pension in the Scheme
If you're still employed by the Company and continuing to build up Pensionable Service in the DB Section (an Active member) the salary used to calculate your pension is subject to a Pensionable Pay Limit. The Pensionable Pay Limit is the amount of your full-time equivalent basic salary on 30 September 2019 or £35,000 pa if higher. Once you reach your Pensionable Pay Limit, you will continue to build up years of service, but the Final Pensionable Earnings used to calculate your pension stops increasing.
As a result, some members may expect a higher benefit if they opt out of the DB Section and become a Deferred member or become a pensioner (subject to eligibility), in either case, becoming subject to the increases described in the following paragraphs. With inflation increasing, you may want to explore your options - the Company has produced a pensions modeller that you can use to help with this.
Increases if you’ve stopped building up further pension but are yet to start receiving it
If you have stopped building up further pension in the Scheme but are yet to start receiving it (a Deferred member) your pension will increase over the period from:
- The date you ceased to be an Active member (this is also referred to as your Date of Leaving); and
- The date you start receiving your pension.
The increase (also referred to as revaluation) considers inflation over this period. The calculation is based on complete years. The revaluation applied to your deferred pension is calculated as follows.
| Benefit | Revaluation |
| Non-GMP benefits | Increases in line with the Occupational Pensions (Revaluation) Orders. These orders currently increase Deferred pensions in line with CPI inflation subject to a cap of 5% p.a.* on pension accrued before 6 April 2009 and a cap of 2.5% p.a.* on pension accrued after 5 April 2009. For members who joined Pensionable Service before 1 January 1990, a minimum level of revaluation also applies. For the purpose of calculating the minimum level of revaluation:
*Measured over your full period of deferment. |
| GMP benefits | If you left the Scheme on or after 6 April 1997 your GMP will increase annually in line with Section 148 Orders. Section 148 Orders are based on the increase in the National Average Earnings Index each year. The same increases to your GMP will apply if you left the Scheme before 6 April 1997, except that the increases will be capped at 5% for each complete tax year between the date you left the Scheme and age 60 (for females) or age 65 (for males). The increases to GMP apply at GMP Pension Age. |
Retirement options and transfer values
The Trustee regularly reviews the terms offered to members in relation to retirement options (for example, exchanging part of your pension for a one-off lump sum which is normally tax-free) and transfer values to reflect changing market conditions. The value placed on your pension can change significantly when these terms change. For example, the amount needed today to pay your pension depends on expected future investment returns and so when interest rates rise as has happened over recent months, this can often lead to a reduction in transfer values.
Scheme funding and high inflation
The Trustee has put in place hedging to help protect the Scheme’s funding position against high inflation. The Scheme continues to be well funded against the funding targets agreed between the Trustee and Company. We regularly publish a Statement of the Scheme’s Financial Health, or Summary Funding Statement.
The Scheme’s rules
As you can see, how your Scheme pension increases is complicated. This article is a brief summary of the Scheme’s trust deed and rules, which is the legal document governing the Scheme, including what pension increases it provides. Whilst every effort has been made to ensure that this article accurately summarises the position in the Scheme’s trust deed and rules, if there is a discrepancy between the pension increases as described in this article and the position under the Scheme’s trust deed and rules, the Scheme’s trust deed and rules prevail.