Pension Increase Exchanges: jam today, butter tomorrow?

UK Power Networks is offering members of their scheme a higher pension, but it comes with a catch for the future.

UK Power Networks (UKPN) is one of the latest employers to offer individuals receiving a pension from the UKPN scheme a higher pension – but with lower increases in the future.

This is known as a Pension Increase Exchange (PIE) option and has become more common in the pensions industry in recent years.

The pension is at the new, higher rate for the rest of the individual’s life, but lower future annual increases will be received.

The offer, which is being made to pensioners registered at March 2019, will take effect from December 2019 for those who decide to accept the revised terms. Spouses’ pensions will be unaffected at present.

It is important to note that unless individuals take up the offer, the way that their pension increases will not change.

UKPN told Prospect in January that the PIE option would be made available to pensioners, but there were no negotiations between the company and the union over the details.

UKPN said it has taken legal advice about these offers, but has declined to share this advice with individual members. 

Prospect pensions officer Joe Anderton said: “Members should consider options like this very carefully. With limited or no cost of living increases, the value of a pension potentially reduces each year because of the effects of inflation.

“There is also the potential that a higher rate of income tax may be payable on any increased current year payment.

“This type of offer can be beneficial for some people, but it is vital that people get independent financial advice before agreeing to any PIE offer.”

Pros and cons of PIE exercises

Ultimately the decision on whether to accept a PIE offer is an individual one, but there are some general factors to consider.

An advantage of taking up a PIE option is that the initial level of pension will be higher. For those who think that their spending may be higher early in retirement, this could be a reason to take up the option.

However, the reverse could be argued in that you may need expensive care later on in life and could benefit from having higher increases to your pension.

Another factor to consider is longevity. When setting the terms of the PIE offer, one factor that the company should have based this on is average life expectancy.

If you are in good health and there is a family history of living until an old age, then having inflation protection to your pension may be more beneficial than a higher starting amount.

Conversely, if you are in poor health then a higher starting pension may be more suitable for you.

Whether or not to take up a PIE option is a personal decision, depending on your circumstances. Obtaining independent financial advice before deciding anything is therefore very important.

Independent advice and data protection

The company, not the Trustee Board, is making these offers. But the trustees have arranged independent advice for those who express an interest. The company will pay the advisers.

Members who express an interest must seek this advice before, and as a condition of, accepting the company offers.

They will also have to answer additional personal questions designed by the advisers. The responses may be recorded and will be used by them to provide the advice.

All this information will be kept by the adviser company and shared with UKPN and/or their professional advisers. Subject to individual member consent, the advising company will also have access to the UKPN pension scheme database.

UKPN said these details would be shared in line with the requirements of the 2018 General Data Protection Act.

But recent “scam” attacks on banks and other large organisations may give members cause to consider the risks involved in this process.

There is a good code of practice guide on incentive exercises like this which can be found here: http://bit.ly/incentives-code

This is a voluntary code; however UKPN has said that they will make the offers in line with this code – this is positive as part of the purpose of the code is to ensure that incentive offers such as this are done fairly, transparently and communicated in a balanced way that members can understand.

General information on options exercises

http://bit.ly/pas-incentives

http://bit.ly/regulator-incentives