Pension Increases in Payment: Statutory Requirements, Discretionary Increases and Inflation Protection

For those receiving a defined benefit pension, the annual increase to their pension payment is one of the most financially significant events of the year — and one that most pensioners understand only superficially. The rules governing pension increases in payment are complex, varying by the period of service that generated the benefit, the scheme's rules, and whether increases are mandatory or at the trustees' discretion.

In a period of elevated inflation — as experienced in 2022–2024 — the difference between a pension that increases by CPI in full and one capped at 2.5% or 5% can be thousands of pounds per year. Understanding what protection your pension provides, and whether discretionary increases have been applied in the past, is essential for retirement income planning.

---

The Statutory Framework: Limited Price Indexation (LPI)

The starting point for DB pension increases in payment is Limited Price Indexation (LPI) — the statutory minimum increase that schemes must apply to pensions in payment (or, in some respects, to deferred pensions before they come into payment).

Service Before 6 April 1997

Pension rights built up before 6 April 1997 are generally not subject to any statutory increase requirement in payment. Many schemes voluntarily increase pre-1997 pension rights, but they are not required to do so. In some older schemes, pre-1997 benefits are fixed nominally — an uncommon but legally permissible position.

Service Between 6 April 1997 and 5 April 2005

For this tranche of service, the statutory minimum increase is LPI capped at 5% — meaning pensions must increase each year by the lower of the RPI increase and 5%. If inflation is above 5%, the pension does not increase by the full inflation rate. If inflation is 0%, no increase is required.

Service From 6 April 2005

For service from April 2005, the statutory minimum increase is LPI capped at 2.5% — the lower of CPI and 2.5%. The change from 5% to 2.5% (and from RPI to CPI as the reference measure) reflects a policy intention to reduce the financial burden of pension increases on private sector schemes.

Importantly, many scheme rules were drafted to a higher standard than the statutory minimum — they provide full CPI or full RPI increases, uncapped. For members of such schemes, the in-payment increase is more protective than the statutory minimum would suggest.

Public Sector Schemes

Public sector DB schemes (NHS, teachers, civil service, armed forces, LGPS) generally provide full CPI-linked increases on the entire pension in payment. This is significantly more inflation-protective than private sector minimum standards and is a key advantage of public sector DB entitlements that is often underappreciated.

In 2022–23, when CPI reached over 10%, NHS and civil service pensioners received the full 10%+ increase on their pension income. A private sector pensioner whose scheme only meets the 2.5% minimum saw their real income fall by approximately 8% in that year.

---

RPI vs. CPI: Why the Measure Matters

For much of the post-war period, pension increases were linked to the Retail Price Index (RPI). In 2011, the Government changed the statutory minimum for in-payment increases from RPI to the Consumer Price Index (CPI). CPI is typically 0.5–1% per year lower than RPI, reflecting methodological differences (RPI uses the arithmetic mean; CPI uses the geometric mean, which produces a structurally lower result).

This change — applied by most schemes to newly accruing service — reduced the expected long-term cost of DB pensions significantly. However:

• Many legacy scheme rules still reference RPI for pre-2011 benefits.
• Scheme rules that promise "RPI-linked" increases cannot easily be changed to CPI without member consent.
• The transition has been legally contested in some schemes.

For members with service straddling the 2011 change, the pension in payment may therefore be split: pre-2011 tranches increase by RPI (or a scheme-specific rule), post-2011 tranches increase by CPI.

---

Discretionary Increases

Beyond the statutory minimum and what the scheme deed and rules promise, some trustees have the power (and occasionally the obligation) to consider discretionary increases — additional uplifts above the required amount.

When Discretionary Increases Are Paid

Discretionary increases are most commonly paid when:

• The scheme is in surplus relative to its technical provisions.
• The employer is financially strong and the trustee has headroom to augment benefits.
• A scheme has a longstanding practice of paying discretionary increases, creating a reasonable expectation among pensioners (though this does not typically create a legal entitlement).

In the 1990s and early 2000s, many private sector DB schemes in surplus routinely paid discretionary increases to keep pace with full RPI. The shift to deficits in the 2000s ended this practice in most schemes. The return to surplus positions in some schemes since 2022 has reopened the discussion.

The Legal Position on Discretionary Increases

Trustees who have a power but not a duty to grant discretionary increases must exercise that power for proper purposes and in accordance with their fiduciary duties. Promising a specific future level of discretionary increase can create a legitimate expectation. In practice, trustees are cautious about discretionary increases and typically require clear evidence of scheme affordability before granting them.

Members should check their scheme's annual report and summary funding statement to understand whether discretionary increases have been paid historically and whether the scheme is in a position to consider them.

---

GMP and Section 9(2B) Rights: The Complexity Within DB Pensions

Within DB pensions, there are often embedded tranches of Guaranteed Minimum Pension (GMP) for service periods when the scheme was contracted out of the State Second Pension (SERPS) before 1997.

GMP increases in payment follow different rules from the main scheme pension:

• Pre-1988 GMP: The scheme has no obligation to increase pre-6 April 1988 GMP in payment. Historically, any inflation increases on this element were provided by the State through the additional State Pension rather than by the scheme.
• Post-1988 GMP: The scheme must increase the post-5 April 1988 GMP by the lower of price inflation (CPI) and 3% per year. The State picks up any inflation increase above 3% on this element through the State Pension itself.

GMP equalisation — following the Lloyds Banking Group High Court case (2018) — has required schemes to equalise male and female GMP benefits. This has involved recalculating benefits for members with service between 1990 and 1997. If you have not received a GMP equalisation communication from your scheme, it may be worth enquiring directly.

---

How Pension Increases Are Applied in Practice

The mechanics of the increase:

1. Each April (or the scheme's chosen "pension increase date"), the scheme applies the relevant increase to all pensions in payment.
2. The increase is calculated separately for each tranche of pension (pre-1997, 1997–2005, post-2005, GMP) and applied to the relevant portion.
3. The scheme must notify pensioners of the increase applied. This appears on the annual pension statement or a specific increase notification letter.

The increase is applied to the gross pension before income tax, not the net amount received. The actual cash increase in your bank account will be less, reflecting income tax deducted under PAYE.

---

Implications for Retirement Income Planning

Inflation Sensitivity

Understanding how much of your pension increases with inflation — and on what measure — is fundamental to projecting your retirement income in real terms.

Example: A pensioner receives £20,000 per year from a private sector DB scheme with 2.5% LPI on post-2005 benefits. Over 20 years at 4% average inflation, their nominal pension grows to about £32,800, but their real purchasing power has fallen to about £15,000 in today's money terms. If the same scheme provided full CPI, the pension would be approximately £43,800 in nominal terms, maintaining close to full real value.

DB Pension Increases and Drawdown Sequencing

For pensioners drawing from both a DB pension and a DC drawdown pot:

• The DB pension provides inflation-linked income (to the extent of the LPI rule).
• The DC pot requires the pensioner to provide their own inflation protection by investing in real assets.
• In high-inflation years, the DC pot may need to provide more income if the DB increase falls short of actual cost-of-living increases.
• The sequencing strategy should account for the asymmetric inflation protection between the two income sources.

Scheme Wind-Up and Insurance Buy-Out

If a DB scheme is wound up and its liabilities are insured (bulk annuity buy-out), the increases in payment are determined by the insurance policy terms — typically matching the scheme's LPI obligations as a minimum. Members should check whether a buy-out by an insurer maintains any discretionary increase practice, as insurers typically do not pay discretionary increases.

---

How Global Investments Can Help

Global Investments provides retirement income planning support for individuals with DB pensions in payment:

• Income modelling: We model the real purchasing power of your DB pension over your expected retirement horizon, incorporating the specific LPI rule and reference index applicable to your scheme tranches.
• DC drawdown calibration: We size the drawdown strategy from your DC pot to complement the inflation profile of your DB income — ensuring combined real income is sustainable.
• DB transfer decisions in retirement: For members who have not yet drawn their DB pension and are considering whether to transfer before commencing benefits, we coordinate regulated advice that explicitly accounts for the in-payment increase provisions of the scheme.
• Global expat perspective: For clients receiving UK DB pension income while resident abroad, we ensure the inflation protection characteristics are considered alongside the DTA tax treatment of the income.

This guide is for general information only. DB scheme rules vary widely. Nothing here constitutes financial, actuarial, or legal advice. Always seek independent advice for guidance specific to your scheme and circumstances. Rules and statistics are as understood in 2026 and may change.