Pension indexation refers to the annual increase of pension payments in line with inflation to help pensioners maintain an appropriate living standard over time. However, for pension rights accrued before April 1997, there is no legal requirement for private sector defined benefit (DB) occupational pension schemes to provide such increases. We explain below the current situation regarding pre-1997 pension rights, including the legal framework, and set out our thinking on ongoing debates about potential changes.
Legal framework for pension indexation
The current legal requirements for pension indexation in the UK are different depending on when pension rights were accrued. There is no requirement for schemes to provide indexation for pension rights accrued before April 1997. For pension rights accrued between April 1997 and April 2005, pensions in payment must be increased annually in line with inflation, capped at 5%. For rights accrued after April 2005, annual increases are capped at 2.5%[1] (although it is open to schemes to be more generous as described below).
Impact on pensioners
The lack of mandatory indexation for pre-1997 pension rights has implications for many pensioners. Those with substantial pre-1997 service may see the real value of their pensions erode significantly over time due to inflation. This means that non-indexation for pre-1997 pension rights has a disproportionate impact on older pensioners, who have a larger proportion of their pension rights accrued before 1997.
The issue of non-indexation is being scrutinised ever more closely in the light of recent periods of high inflation, as the real-world purchasing power of these pensions diminishes, creating financial hardship for many retirees who had planned their retirement based on the expectation that their pension would continue to allow them to maintain their standard of living over time.
Discretionary increases to pension benefits
Despite no legal requirement, some pension schemes have historically provided some form of inflation protection voluntarily. The Pensions Regulator’s research published in March 2025 includes data which shows that 67% of DB schemes have rules that allow for trustees to provide discretionary benefit increases and that, of these, 32% had provided a discretionary increase in the past three years. Of the DB schemes that made discretionary increases, 15% of the instances of discretionary increases were increases of pre-1997 pension benefits.[2] Almost half of schemes where rules permit discretionary increases have opted to offer them. However, concerns remain about the reason for relatively low levels of discretionary increases, particularly for pre-1997 rights. Leaving increases for pre-1997 pension rights to the discretion of the trustees is also of increasing concern in a climate where buy-out is often considered the endgame strategy for DB schemes. On buy-out, members will typically lose any discretionary benefits that have not been crystallised, as insurers will not generally insure discretionary benefits. Given only a limited number of schemes offer
such discretionary increases of pre-1997 pension rights and, as the legal framework does not mandate this indexation, it is unlikely that many trustees will choose (and/or that sponsoring employers will agree) to crystallise discretionary increases for pre-1997 rights when preparing for a buy-out.
such discretionary increases of pre-1997 pension rights and, as the legal framework does not mandate this indexation, it is unlikely that many trustees will choose (and/or that sponsoring employers will agree) to crystallise discretionary increases for pre-1997 rights when preparing for a buy-out.
Government position
The UK government has maintained a position against requiring indexation of pre-1997 pension rights for many years, whichever party has been in power. However, the Department for Work and Pensions (DWP) Select Committee recently published the government’s response to the committee’s enquiry into DB pension schemes, suggesting a willingness to engage in the issue. Among the recommendations is that the DWP should work with The Pensions Regulator to “understand why schemes are not making discretionary pre-1997 payments and monitor trends”. Where scheme rules allow for discretionary increases, the government considers that trustees must carefully consider “the impact inflation has on member’s benefits” when making decisions about discretionary increases to benefits.[3]
This government response also states that it will consider the indexation of pre-1997 benefits paid by the Pension Protection Fund (PPF). Currently, the PPF does not provide indexation for any compensation paid in respect of benefits accrued before April 1997. The government says that it will engage with the PPF and consult on the potential introduction of indexation for pre-1997 pension benefits for affected members. However, it was also noted that the introduction of any level of indexation would have an impact on public finances.
Final thoughts
Although the government’s response does not go so far as to suggest a sweeping change in the law as it currently stands, it does recognise that inflation is having an eroding impact on the value of retirement income for those with a higher proportion of pension rights accrued pre-1997. This can only be seen as a positive step in government engagement.
For individuals affected by this issue, it is important to understand their specific scheme rules and any discretionary practices that may apply to their pension. The trustees of some schemes may voluntarily provide increases even though not legally required to do so, but these arrangements can be subject to change and cannot be relied upon, leaving pensioners with ongoing uncertainty about their income in the long term.
[1] https://commonslibrary.parliament.uk/research-briefings/sn05656/
[3] https://committees.parliament.uk/publications/47677/documents/249040/default/
