Where a scheme does not use the statutory default for pension increases, its rules may permit or require trustees to use one year’s deflation to offset any inflationary increase due the following year.
For some schemes, there may also be the opportunity to reduce pensions in payment if inflation lasts a whole calendar year.
Rash Bhabra, head of corporate consulting at Watson Wyatt, said: “If the scheme rules allow one year’s deflation to cancel out the following year’s increases, cost-conscious employers will not rush to pay for increases that do not have to be given.
“Trustees may also question whether awarding pension in-creases above those required by the rules is fair on younger members, particularly if the scheme has a big deficit.”
Bhabra added that reducing pensions in payment could lead to penal tax charges that would make this unattractive for an employer.
David Everett, research partner at Lane Clark & Peacock, pointed out that all schemes could take deflation into account when revaluing pension benefits for deferred members, while deflation could end up cutting liabilities through limits on pay increases.
He added: “The possibility of a bout of inflation in years to come could more than undo any temporary gains enjoyed by pensioners over the next year or two.”
