Pension clawback – also known as state deduction or state pension integration – is the practice of adjusting a defined benefit occupational pension scheme to take account of the state pension
State pension integration “is a relic from the past and needs to be abolished”, MPs have said as part of a debate about the practice used at the post 1974 Midland section of the HSBC Bank Pension Scheme.
Pension clawback – also known as state deduction or state pension integration – is the practice of adjusting a defined benefit occupational pension scheme to take account of the state pension. Adjustment can take various forms – changing what counts as pensionable salary or how the pension itself is calculated.
Where the pension calculation is adjusted, this can result in a reduction to a pension in payment if a member starts to receive their occupational pension before the state pension.
State pension integration was used by a number of employers, including Midland Bank, to cut the cost of their pension schemes although, according to 2023 research by the University of Exeter, State Pension Integration: Expectations and Equality, many schemes no longer use the system.
In a House of Commons debate yesterday (23 April) Liberal Democrat MP Manuela Perteghella cited her support for the Midland Clawback Campaign, a group that says members of the Midland scheme were misled about the nature of their retirement income and are being short-changed as a result.
Perteghella said: "Unlike most other institutions, which phased out clawback in the 1980s, HSBC continues to enforce it in its most punitive form. Clawback was originally introduced in 1948 to offset national insurance costs when the state pension was created. Midland Bank introduced clawback to its pension scheme in 1975 as a cost-saving measure.
"Former employees were told that they would receive a defined-benefit pension at two thirds of their final salary, in addition to their state pension. Instead, when they reached state pension age, HSBC began deducting a portion of their occupational pension, calling it a ‘state deduction'."
Labour MP Lee Pitcher added: "I have a constituent who has worked for 44 years at Midland Bank and HSBC. They were promised a pension of two thirds of their final salary, but they now face a 16% cut – that is over £1,700 per annum – because of the so-called state deduction. They were never told that the scheme was integrated, and even private pension reviews failed to explain it."
Other MPs – including Liberal Democrat MPs Clive Jones, Lisa Smart and Gideon Amos; Labour MPs Luke Myer and Alison Hume; Plaid Cymru MP Ann Davies; and DUP MP Jim Shannon – also took part in the debate, arguing the policy needed to be reconsidered or abolished altogether.
Responding to the debate, minister for pensions Torsten Bell said he sympathised with anyone who expected a straightforward income increase when their state pension kicked in, only to find that things were much more complicated than that – noting he had read and listened to representations on this issue himself.
He said the original aim of integrated schemes was to provide a smooth level of pension income throughout retirement that started before the state pension age was reached, with a higher amount of occupational pension paid before state pension age, followed by a reduction in the occupational pension when the member received their state pension.
Bell said it was very important that the amount of the reduction set out in the pension scheme rules was clearly communicated to those involved.
He said: "While the aims of integrated pensions are clear, it would, of course, be a big shock to anyone to see their occupational pension reduced upon receiving the state pension if they had not expected it. It is therefore important for employees to understand the pension benefits they can get from their scheme, and the government place great weight on the importance of that clear communication, without which no one can plan properly for the future."
Bell noted that, if savers had not received clear communication in the form required by law, they must have avenues of redress – noting they could bring a complaint through their scheme's internal dispute procedure or, if that does not resolve the issue, to The Pensions Ombudsman.
But he said the government could not retrospectively change the benefits schemes offered to members.
He explained: "There have been some calls tonight for the government to compel the withdrawal of integration arrangements – those calls have been common for some time, and I have heard them.
"I recognise some of the arguments being made, but I owe it to this House to be clear that we cannot retrospectively change the benefits schemes offered to their members. Any legislative change would affect all integrated schemes, risking the future of some that are less well funded."
Inflationary increases
The debate also touched on the issue of inflationary increases for scheme members.
Liberal Democrat MP Al Pinkerton cited the experience of Terry, one of his constituents, who worked for a large American multinational company.
He said: "As a consequence of the Pensions Act 1995, he found his pre-1997 pension contributions decoupled from inflation. Because of the nature of inflation, his savings, which he now depends on, have been gradually eaten away and he finds himself in increasing levels of destitution. Will the minister look at the issue with the seriousness that it requires?"
Bell said he sympathised with those members who had understood that they would receive ongoing discretionary increases, only to be let down but noted some schemes do provide indexation above the legal minimum on a discretionary basis.
Bell said he had now met several groups of MPs on exactly this issue, and had asked the Department for Work and Pensions to work with The Pensions Regulator to understand why schemes are not making discretionary payments and to monitor trends.
He said: "Both trustees and employers need to think carefully about the effect of inflation on members' benefits—that is especially true on the back of the exceptional inflation in recent years.
"Pension scheme trustees, after all, have a fiduciary duty to scheme members—a duty they should apply when considering discretionary increases. That is directly relevant to recently announced reforms on the use of surpluses in defined benefit schemes, as several members have raised. Those reforms will make it easier for individual schemes to make decisions that improve outcomes for sponsoring employers and members. That could include discretionary benefit increases, where trustees can consider the situation of those members who would benefit from such rises and whether the scheme has a history of making such payments. Trustees will, in negotiation with the employer, be responsible for determining how members may benefit from any release of surplus."
