Clause 12 - Revaluation of accrued benefits

Part of Pension Schemes Bill – in a Public Bill Committee at 2:00 pm on 28 October 2014.

Alert me about debates like this

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 2:00, 28 October 2014

I thank the hon. Gentleman for his question. Essentially, what it means is that in many cases the status quo will continue to prevail. For example, if someone is already in a defined-benefits final salary pension scheme, the way that their existing rights are revalued will be the same way that they are currently revalued. However, where a brand new scheme is invented—a scheme with collective benefits—the default will not be the indexation or revaluation method used for final salary pensions. It will be the default method set out in schedule 2.

I must admit that when I saw there were four different methods of revaluation, my first question was, “What are they?” If it would be helpful, I will just explain what the four different methods are.

The final salary method says that where the amount you have built up is salary-related—that is to say, raised to your final salary—and where an amount in this case is added to the deferred pension to take account of inflation between leaving pensionable service and retirement in line with the annual revaluation order, which is something we will debate each year, potentially as an annual regulation that affects inflation.

The average salary method is where salaries have to be revalued in the same way for active and deferred members. Then, there is the flat-rate method, whereby benefits, as opposed to salaries, for active and deferred members have to be revalued in the same way. Finally, there is the money purchase method, where investment, yield and any bonuses have to be applied in the same way for active and deferred members.

There are all those different ways, and as I said earlier we introduced a fifth one for cash balance and we no longer think we will need a separate one. But the basic idea is that there is a rational method whereby if someone is a member of these new types of pensions and they leave, their money is not only left purely to be devalued by inflation but there is a method appropriate to that kind of pension scheme to bring it up to date, to the point at which someone draws it.

I did not get terribly close to lay terms there, did I? However, I hope that that response gives the hon. Gentleman a sense of what we are trying to achieve with this clause.