Hello The question suggests the following: The scheme provides a pension that is guaranteed to increase in payment in line with price inflation. The sponsor has proposed to the trustee that members should be offered at retirement an option to convert their pension to one which increases at the minimum rate required by legislation. Interpreation of the question: Even if the scheme were to not make any such proposal, how can the pension in payment inflation be lower than the statutory requirement? Is it not obvious that irrespective of what the prevailing inflation is, the scheme must offer a minimum increment in line with what is required by the legislation? How is it an incentive for the members? For e.g. The statutory requirement may be that pension increases in line with price inflation or 2.5% p.a. whichever is lower. Current Price inflation = 3.5% p.a. Before the proposal - The scheme must offer a 3.5% increment, After the proposal - The scheme will now have an option to offer 2.5% instead of 3.5% which was promised earlier. So the pension increase benefit offered is in fact lower under the new proposal. Can someone please help me with the interpretation or correct my understanding?
This option to usually known an a Pension Increase Exchange (PIE) i.e. an option offered to members whereby they exchange their entitlement to future non-statutory pension increases for a one-off uplift to their pension. In this question the idea is to offer members on retirement the option to covert their pension increasing with price inflation to a higher initial pension with lower future pension increases equal to those required by statute.
