Around 330,000 pensioners across Britain are set to receive a share of £1.8billion in compensation after new legislation closed a longstanding loophole that left some retirement benefits without inflation protection.
The Pension Schemes Act, which came into force last month, resolves an issue affecting members of failed defined benefit schemes whose employers collapsed and whose pensions were taken over by the Pension Protection Fund (PPF).
The PPF is expected to begin contacting affected pensioners next month in what it described as a major notification exercise.
Many eligible members are now in their late seventies, eighties and nineties, having waited years for the loophole to be addressed.
More than 2,000 defined benefit schemes are affected.
Defined benefit pensions provide a guaranteed income based on salary and length of service and were once widespread across sectors such as banking, rail and coal mining.
When an employer sponsoring such a scheme becomes insolvent, responsibility for payments transfers to the PPF.
A quirk in pension law meant there was no requirement for inflation‑linked increases on benefits earned before 1997.
Over 300,000 pensioners to receive compensation after pension inflation loophole closed in new law
|GETTY
While some employers applied increases voluntarily, others did not, leaving many pensioners with incomes that eroded in real terms over time.
Under the new arrangements, affected pensioners are expected to receive average annual payments of around £300, paid monthly from January 2027.
Future increases will be capped at 2.5 per cent a year.
The compensation will not be backdated, and the changes do not apply to schemes sponsored by solvent employers.
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The administrator’s report highlights the scale of losses suffered by members
| GETTYThe overall cost is estimated at £1.8billion, with the PPF funding around £1.2billion and a further £600million coming from the taxpayer‑backed Financial Assistance Scheme.
The PPF’s reserves currently stand at around £14billion, and it provides protection for roughly £1trillion of liabilities across 5,000 defined benefit schemes.
Richard Nicholl, executive committee member of the Pensions Action Group, said many pensioners had seen substantial sums wiped out because their benefits were not inflation‑proofed.
“We’ve lost a hell of a lot,” he told The Mail on Sunday, estimating losses of between £60,000 and £150,000 per person.
Mr Nicholl also warned that frozen income tax thresholds could reduce the value of the additional payments.
“The freezing of income tax allowances means the Government will get the payments straight back,” he said.
He expressed disappointment that proposals for one‑off lump‑sum compensation — backed by former pensions minister Ros Altmann — were rejected by the House of Lords.
“A lump sum would have been better because most of the recipients are in their late 70s, 80s and even 90s,” he said.