An expanded explainer of discretionary pension increases, the BP legal dispute, and why these issues are gaining urgency among British expatriates.
Defining Discretionary Increases in the Context of Defined Benefit Pensions
Defined Benefit (DB) pensions are often viewed as the gold standard of retirement income arrangements. These schemes commit to paying a fixed proportion of an employee’s previous salary, typically based on a final or average salary formula. However, many pensioners are unaware that not all elements of these pensions increase automatically in line with inflation.
While legislative requirements mandate that pension benefits accrued from April 1997 onward receive minimum annual increases based on the Consumer Prices Index (CPI) – capped at 5% between 1997 and 2005, and at 2.5% thereafter – any enhancements to benefits earned prior to April 1997 are not required by law. Instead, they depend entirely on a concept known as discretionary increases.
Discretionary increases refer to additional, non-compulsory adjustments made to pension payments that aim to preserve purchasing power in the face of inflation. These increases are not legally mandated but may be granted by the trustees of the scheme, often in consultation with the sponsoring employer. Whether such increases are made depends on several factors:
- The wording of the scheme’s trust deed and rules
- The financial position and funding level of the pension scheme
- The willingness or strategic preferences of the sponsoring employer
- The legal and fiduciary framework governing trustee decisions
Discretionary increases represent a crucial, though often overlooked, mechanism for protecting long-serving members from inflationary erosion – particularly those whose benefits were earned in the pre-1997 period.
The Real-World Impact: Why Discretionary Increases Matter
For British pensioners residing overseas, particularly those in Southeast Asia, the absence of discretionary increases on pre-1997 service can lead to a substantial long-term reduction in the real value of their pension income. This cohort does not have access to means-tested top-ups such as Pension Credit, nor do they benefit from auxiliary support like the UK’s Winter Fuel Payment. Consequently, expats often rely heavily on their occupational pensions to maintain a reasonable standard of living.
When inflation rises – as it has markedly since 2021 – any portion of the pension that remains fixed begins to lose its value in real terms.
- Consider a retiree with £10,000 in annual DB pension income.
- Without any inflation-linked increases, a cumulative inflation rate of 15% over five years effectively reduces their purchasing power by £1,500.
- Over a decade or longer, the compounding effect of inflation can result in a serious decline in financial stability.
- This issue is further exacerbated for expats – unstable exchange rates, high healthcare costs, or different inflationary profiles.
Even minor percentage-point discretionary increases, if granted annually, can have a material impact on financial wellbeing.
The BP Pension Dispute: A Case Study in Growing Controversy
In 2022 and 2023, BP’s pension fund trustees, with the backing of the company’s leadership, chose not to award a 4% discretionary increase to scheme members, despite considerable inflation and a reported funding surplus. This sparked an organised response from affected pensioners, many of whom saw their pension’s real value decline rapidly.
According to the BP Pensioner Group, the value of affected pensions fell by 11% in real terms over two years. This loss – in purchasing power, not nominal figures – prompted the Group to initiate legal proceedings in December 2023 against senior BP executives and trustees. The case alleges a failure to protect members’ interests, despite the scheme’s financial capacity to offer inflation mitigation.
The matter reached national prominence in January 2024, when Pensions Minister Paul Maynard acknowledged the dispute in Parliament and committed to “look closely again” at how discretionary increase powers are exercised in such contexts. This intervention is rare, and signals that the Government recognises the broader implications for policy and regulation.
The BP case exemplifies the friction between trustee discretion, employer strategy, and member expectations – and raises concerns about transparency, accountability, and fairness in managing surplus assets.
The Legal and Regulatory Framework: How Discretionary Powers Operate
In legal terms, trustees of occupational pension schemes must act in the best financial interests of members, within the confines of their powers as defined by the trust deed. These powers can vary significantly across schemes. Some require joint agreement between the trustees and the employer for any discretionary award; others may allow the trustees to act independently.
Where discretionary increases are permitted, legal precedent confirms they do not create entitlement. Even where such increases have been granted consistently for years, courts maintain that they remain discretionary unless the scheme rules state otherwise. Trustees must also:
- Consider inflationary trends and the adequacy of member benefits
- Evaluate the scheme’s long-term funding strategy and journey toward buy-out
- Weigh employer representations, particularly in the context of future contributions or solvency
- Comply with formalities, including documented resolutions and conflict-of-interest protocols
Crucially, trustees must distinguish between different member groups (e.g. pensioners vs deferred members), and may be justified in prioritising one over another, provided such decisions are well-reasoned and legally sound.
A Narrowing Opportunity: Why Timing Matters
Discretionary increases are often impossible to secure once a scheme has entered buy-out or has been wound up. In a buy-out, pension liabilities are transferred to an insurance company, which issues individual annuities. These contracts are fixed: they provide only what is required under the scheme rules and cannot include ad hoc discretionary enhancements.
Therefore, the pre-buyout phase represents a closing window of opportunity. If you are in a scheme that has not yet secured all benefits with an insurer and still allows for discretionary increases, this may be the last realistic opportunity to seek one. Once the transaction is complete, the possibility vanishes.
This is particularly relevant for expats whose schemes are actively de-risking or approaching full funding. Early engagement, either individually or through pensioner groups, can influence trustee decisions while powers still exist.
Practical Recommendations for Expats
To avoid being caught off-guard, British expats should consider the following actions:
- Engage with your pension scheme: Ask specific questions about whether discretionary increases are considered annually and under what conditions they may be awarded.
- Review the trust deed: Seek clarification on what your scheme’s rules say about inflation increases and whether pre-1997 benefits are protected.
- Organise with others: Join a collective group like the BP Pensioner Group or start one yourself. Collective lobbying has already prompted Parliamentary discussion.
- Get expert advice: Get in touch with a regulated pensions advisor who understands both legal structure and cross-border implications.
- Monitor scheme communications: Don’t ignore scheme and pension newsletters, trustee reports or UK Government updates. Small clues often signal bigger policy changes.
Conclusion: Discretionary Increases Are a Justice Issue
While labelled “discretionary,” these increases are more than a technicality. For many long-serving pensioners – especially British expats – they represent the only hope of keeping pensions aligned with rising living costs.
The refusal to grant them, despite clear capacity to do so, undermines trust in occupational schemes and creates a form of two-tier pension security. One group sees its benefits protected against inflation; the other does not.
For British expats, who are uniquely vulnerable due to geographic distance, currency exposure, and the absence of UK social welfare entitlements, this issue is not optional – it is essential. So we advocate for practical clarity and informed action.
We encourage all expats to examine their pension schemes closely, act before powers are lost, and stand collectively when transparency or fairness is lacking. Join us or get help.
We will continue to monitor policy changes and legal developments, and provide regular updates tailored to the needs of the expat community.
Knowledge is leverage. Use it wisely.