Now might be the right time?
With inflation on the rise and GMP equalisation on the agenda, for some trustees or scheme sponsors now might be the right time to consider introducing a Pension Increase Exchange (or PIE) option.
This is an option for DB members to exchange their future non-statutory pension increases in return for a pension that is initially higher but will then increase more slowly.
But who qualifies?
This option can be provided to pensioners or dependants as a one-off exercise, or on an ongoing basis to members as and when they retire. A PIE option can be attractive to members because it allows them to enjoy more income whilst they are younger and potentially enables non-retired members to retire earlier and take a higher tax-free cash lump sum. At the same time, it can enable a scheme to reduce risk and potentially improve funding and accounting positions and help close the gap to buy-out.
A well-designed option can therefore be a win-win-win for members, trustees and scheme sponsors.
Flagging the drawbacks
From a member perspective more now means less later. Whether an individual ends up better or worse off overall and whether that matters to them will depend on factors such as how long they live, how high future inflation is, what their income needs are and their tax position. There are costs associated with implementing the option and the expected relative benefits will depend on several scheme specific factors such as benefit structure and membership profile.
Treading with caution
In recent years I have been cautious advising clients to implement a new PIE option because of the uncertainties caused by both the Lloyds judgement in 2018 regarding GMP Equalisation and RPI reform. However, following the publication of helpful industry guidance on GMP Conversion from PASA, together with the November 2020 announcement that RPI will be aligned to CPIH from 2030 and now increased market expectations for future inflation I believe it is the right time for many schemes to consider a PIE option again.
The right time might be now
The key reason why now might be the right time to consider a PIE option is the ability to combine both GMP conversion and a PIE. Very few ongoing schemes have completed GMP conversion to date given the complexity of the subject. However, the PASA guidance, authored by LCP Partner Alasdair Mayes, outlines a clearer path for schemes wishing to undertake GMP conversion and I expect more schemes to now proceed down this route.
GMP conversion can increase the amount of pension with non-statutory increases that can be exchanged. It can therefore increase the potential benefits to members, trustees and sponsors of a PIE option. Given that both GMP conversion and a PIE option require detailed calculations, careful member communications and sound project management, it can be more efficient to run both projects together.
Schemes introducing a PIE option should ensure member communications are fair, clear, unbiased and straightforward and should consider the level of guidance or advice provided to members to support their decision making.
And to summarise…
Given the trend on inflation, and recent helpful guidance on GMP conversion, I expect to see more trustees and scheme sponsors introduce a PIE option as they continue to de-risk whilst at the same time provide an attractive option to members.