Some of the world’s richest companies are accused of exploiting a loophole in pension law to freeze increases in payouts for many former UK employees, despite the cost of living crisis.
The companies, which include Hewlett Packard Enterprise (HPE), American Express and Pfizer, are being urged to “do the right thing” and increase these frozen pension payouts in line with inflation. MPs have condemned the failure of companies to increase the payments in the face of high inflation in recent years as “heartless” and “unethical”.
The Pensions Act 1995 aimed to strengthen regulation after Robert Maxwell plundered millions of pounds from Mirror Group pension schemes.
The act introduced a general requirement to link final salary pension schemes to inflation, but it left a gap in the legislation because there was no requirement to provide such an uplift for company pension benefits accrued before April 1997.
Thousands of pensioners in many schemes now depend on “discretionary” increases by companies, in addition to any rises that apply under legislation.
While most companies link these pre-1997 defined benefit pension payouts to inflation, some multinationals have repeatedly ruled against the discretionary increases over several years while earning billions of pounds in profits.
Patricia Kennedy, co-chair of the Hewlett Packard Pension Association, said: “The majority of companies do the right thing and pay some form of inflationary increase. There’s a small number that don’t pay.”
The association represents about 2,000 former employees of the Digital Equipment Corporation (DEC). The business was acquired in 1998 by Compaq, which was then acquired by Hewlett-Packard (HP) in 2002.
Since the date of that acquisition, discretionary increases for pre-1997 pensions under HP have totalled just 5%, with a 1% rise in 2004, another 1% rise in 2008 and a further 3% rise in 2022.
Fraser Bridgeford, 65, a former employee at DEC’s Ayr facility in Scotland, said what should have been a “gold-plated” pension had turned to “rust”, with the buying power of his pre-1997 pension of approximately £14,000 falling by about 20% in five years.
He said: “I was a loyal employee for over 23 years and believed this loyalty would be repaid. Instead, I face financial uncertainty in my retirement.”
David McIlroy, 70, another former DEC employee, who has a pension worth about £9,400 a year, said: “The pension was described to us at the time as the gold standard. The expectation was that it would be upgraded with the cost of living.”
At a parliamentary debate in May on pension schemes, MPs said HPE presented itself as an ethical company but was taking advantage of a weakness in UK pension legislation relating to pre-1997 service. The business was accused of “unacceptable” behaviour and of practices that, while legal, were “heartless, immoral and unethical”.
Pension groups are now calling for an inquiry by the Pensions Regulator to establish the scale of the issue and consider new laws to ensure inflation-linked increases for pre-1997 defined benefit pensions.
Amex made global profits of $8.4bn in the year ending 31 December 2023.
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Pension groups say the manufacturing company 3M and pharmaceutical multinational Pfizer are also among the those that have failed to properly link pre-1997 pensions to inflation for former UK employees.
Figures published by the Pension Protection Fund show about one in four pre-1997 schemes do not have any mandatory rules under their schemes to increase payouts.
A spokesperson for the Pensions Regulator said: “Minimum indexation requirements for pension benefits are set out in legislation. What discretion trustees have to increase member benefits depends on a particular scheme’s rules, but we know most schemes do provide for pre-1997 increases. Introducing new legislation in this area would be a matter for government.”
A Department for Work and Pensions spokesperson said: “Our priority is making sure companies are meeting their promises over defined benefit pension schemes and we’re working with the Pension Regulator to understand where that’s not being met – while striking the right balance between providing members with protection against inflation while not making schemes costs unaffordable.”
The companies involved said they comply with all relevant pension laws.
An HPE spokesperson said: “Each year, we carefully consider whether to grant discretionary increases to relevant pensioners based on a number of factors. HPE UK will continue to give this matter due and appropriate consideration.”
An Amex spokesperson said: “American Express complies with all its pension obligations. The company annually reviews whether a discretionary increase will be awarded in respect of pre-1997 pensions. The next review will be in 2025.”
A spokesperson for Pfizer said: “Pfizer UK has an obligation to patients, colleagues and shareholders to apply company funds responsibly. We apply the same responsibility to decisions around discretionary pension increases, considering all appropriate factors alongside the overall market position.”
3M has been contacted for comment.