Pensions Act 2004

Pensions Act 2004

2004 CHAPTER 35

Commentary on Sections

Part 5 – Occupational and Personal Pension Schemes: Miscellaneous Provisions

Annual increases in rate of pensions

Section 278: Annual increase in rate of certain occupational pensions

1122. Section 51 of the Pensions Act 1995 requires that certain private sector occupational pensions on or after 6th April 1997 must be increased annually by at least the appropriate percentage. This is the lesser of the revaluation percentage and 5%. This requirement is modified by section 278 so that pensions derived from salary related benefits built up on or after the “commencement day” are to be increased by at least the annual percentage increase in the Retail Prices Index (the general level of prices in Great Britain) or 2.5%, whichever is the lesser. In addition, the requirement for an annual increase will not apply to pensions deriving from money purchase benefits which come into payment on or after the “commencement day”. The “commencement day” is the day appointed for the coming into force of section 278.

1123. Subsection (2) amends section 51(1) in order to clarify the basis on which the section applies.

1124. Subsection (3) ensures that pensions derived from money purchase benefits that are already in payment before the commencement day, continue to be required to be indexed.

1125. Subsection (4) amends section 51(4)(b) by specifying that the maximum “relevant percentage” for Category X and Category Y pensions is 5% and 2.5% respectively. The relevant percentage is the minimum amount by which a pension must be indexed – that is the Retail Price Index or 5%/ 2.5%, whichever is the lesser,

1126. Subsection (5) inserts new subsections (4A), (4B) and (4C). New section 51(4A) defines a Category X pension as being one which is in payment before the commencement day or is a pension which will derive wholly from pensionable service before the commencement day. New section 51(4B) defines a Category Y pension as being one which will derive wholly from pensionable service on or after the commencement day. New section 51(4C) provides for different indexation requirements to apply where the pension becomes a pension in payment on or after the commencement day and will derive from pensionable service before and after the commencement day.

1127. Subsection (6) amends section 51(5) so that any regulations made under this subsection may provide that any of the provisions of section 51 apply to a pension as if so much of it as would not otherwise be attributable to pensionable service or to payments in respect of employment were attributable to such service or payments before or on or after the commencement day.

1128. Subsection (7) inserts new section 51ZA into the Pensions Act 1995 and provides a new definition for the “appropriate percentage” (the minimum amount by which a scheme must increase its pensions in payment). This replaces the definition in section 54(3) of that Act.