Consultancy Services - Liability Management

Pension Increase Exchange (PIE) Case Study

Pension Increase Exchange (PIE) Case Study

Pension Increase Exchange - PIE

Pension Increase Exchange - PIE


Charles Cowling FIA Charles Cowling FIA
Rob Dales FIA Rob Dales FIA

Pension Increase Work

Many companies are commencing exercises where members are offered the opportunity for exchanging non statutory pension increases for a higher non increasing pension. The basis of this exchange is normally such that a source of uncertainty and risk is removed from the scheme and the cost of the alternative benefits can be cheaper for the scheme to provide.

Why are companies offering this option?


The principal reasons for companies asking Trustees to change the scheme rules and offer this additional option are:
  • Increasing pensions are expensive to provide, especially when interest rates are low, inflation is rising and longevity increasing.
  •   The exchange is on the basis that the cost of the alternative benefits leads to a reduction in deficit, partially as a result of the member taking a higher tax free cash sum.
  • Whilst there is an initial increase in pension payment (and PPF levy) the overall liability reduces due to the increased cash payment and conversion terms offered to members.
  •   This option does not involve the company paying for an incentive.
  • Whilst the savings will only emerge over time (as members retire) it should be possible to build an appropriate assumption in to Technical Provision calculations.


Why would members exchange pension increases?

Defined benefit pension schemes provide members with limited choice at retirement which has no reflection of their personal circumstances. There are a number of reasons why a member would exchange increases even if they are told the value of the alternative benefit is lower, namely:

  • Research shows that members with a choice (i.e. those who have to purchase an annuity at retirement from a defined contribution scheme) predominantly select a level pension to maximise the initial income.
  • For a number of pension scheme members an increasing pension in retirement is franked against state benefits thus they may be no worse off without the increases.
  • A higher initial pension could lead to a higher tax free cash sum payable on retirement.
  • Members may see the offer as good value (even where they are told the value is lower than the original benefits) if their expectations on life expectancy are shorter than assumed in valuing the liabilities.
  • The cost of living in retirement does not necessarily increase with inflation as the level of activity reduces with age. Members want the highest income when they are less active due to ill health and infirmity. 

Can this be offered to pensions in payment?

Subject to the Trustees agreeing to the appropriate Rule changes it is possible to offer this to pensioners but the option of higher tax free cash is not available. Offering to current pensioners can give an immediate impact on the deficit.


Correctly planned and implemented exercises can be a win-win for members, companies and trustees. The first steps to such an exercise would be a feasibility study to analyse current membership and model potential outcomes.