Some workplace pension schemes use pension clawback to deduct a percentage of your state pension from your works pension when you reach state pension age. Is this legal and can you do anything about it?
Pension clawback or pension integration explained
Pension clawback or pension integration means that when you reach state pension age, your workplace pension scheme takes some money away from the pension payments you receive.
This means that you’ll receive a lower regular pension payment from your workplace pension than you received before you reached state pension age. Because of the way pension clawback works, many women stand to lose out more than men.
SAVVY TIP: The pension clawback is sometimes called pension integration or a ‘state deduction’. It goes by various terms.
HSBC is currently in the news because one of the pension schemes run by the Midland Bank (which HSBC took over in 1992), has a pension clawback clause. There’s a campaign to get this abolished.
How much could you lose?
The amount of money that your workplace pension scheme can take away from the pension payments you receive are normally based on the number of years you’ve been in the workplace pension scheme as a percentage of the state pension.
HSBC, which uses pension clawback in one of its old Midland Bank pension schemes, takes away 1/80th of the basic state pension payment for every year that you’ve been a member of their pension scheme. There’s a cap on the clawback which means you cannot lose more than 50% of the value of the state pension.
With some workplace pension schemes, the clawback is not applied to the whole of someone’s pension, but to the pension they built up before or after a certain date.
Who operates pension clawback or pension integration schemes?
Pension clawback schemes were quite common in the public and private sector up until the 1970s and 80s. A number of workplace pension schemes abolished pension clawback in the 1980s and 1990s. However, a report from the pension schemes’ organisation (now called the Pension and Lifetime Savings Association) showed that in 1998, almost half of workplace final salary pension schemes used pension clawback. By 2005, a report from the same organisation showed that 70% of workplace final salary or hybrid pension schemes didn’t use pension clawback (this figure was down from 60% in 2002).
Why hasn’t pension clawback been scrapped?
There have been legal challenges to aspects of pension clawback since he 1990s. In 1993 a case went to the European Court of Justice relating to bridging pensions. It challenged two aspects of pension clawback on the basis of discrimination but the legal challenge failed. You can read more about the legal challenge via a link at the bottom of this article.
SAVVY TIP: A bridging pension is used to describe a workplace pension payment that someone receives before they reach state pension age.
A campaign by the finance trade union, Unifi, was launched in 1998 to get Barclays to scrap its pension clawback rules. A year later, the bank changed its rules so that no pension built up before 1977 would be included in clawback. There have been several attempts to abolish pension clawback schemes, both in parliament and through campaigns.
How pension clawback affects women
Pension clawback disproportionately affects women. Why? Three reasons:
- The amount of your workplace pension that is clawed back is based on the number of years you’ve been a member of the workplace pension scheme and not the amount of pension you’re due to retire on. It is a flat rate, typically 1/80th of the state pension for every year you’ve been a member of the workplace pension scheme.
- The clawback doesn’t have to take account of the fact that someone may have worked part time throughout their career.
- The amount of your workplace pension that you lose is based on the full basic state pension, not the amount of state pension that you actually receive. Figures show that until 2010, while well over 90% of men received the full basic state pension, fewer than 45% of women did. Worse than this, women who paid the Married Women’s Stamp (a reduced rate of National Insurance that meant they had no entitlement to a state pension in their own right) still had their workplace pension clawed back as if they received a full basic state pension.
SAVVY TIP: That figure of 45% has increased sharply since 2010, but it’s still the case that more men than women qualify for the full state pension.
In 2004, Kerry Pollard (an MP) quoted some examples of how pension clawback disproportionately affects low paid and part-time workers. I’m using these examples because I think they illustrate the point very well.
- A senior manager, John, who retired on a final salary of £45,000 and who’d been a member of the employer’s pension scheme for 40 years would receive a pension of £27,712 a year. This takes into account the effect of pension clawback. His pension works out at 61.5% of his final salary.
- Bob, a shopfloor worker on a final salary of £15,000 a year who’d been a member of his pension scheme for 40 years would retire on £7,712 after pension clawback. This works out at 51% of his salary.
- A part-time cleaner, Cathy, on a final salary of £8,000 a year who’d been a member of her pension scheme for 40 years would receive a pension, after pension clawback, of £3,045. This is 38% of her salary.
I’ve mentioned that the practice of pension clawback has been challenged in the High Court and in the European Court of Justice on the basis that it’s discriminatory. The challenges have failed. However, as a non-lawyer I think this type of clawback is very definitely discriminatory – against women who are more likely to be lower paid and work part time.
What’s happening now?
Frank Field MP, who’s chairman of the Work and Pensions Select Committee has questioned whether these schemes are fair. He’s written to the UK chief executive of HSBC to ask whether the information given to pension scheme members was clear and when they were given to pension scheme members.
There was also a parliamentary motion in 2017 (which only got 45 signatures) calling on the government to abolish pension clawback schemes.
Guy Opperman, pensions minister, said that it would be wrong for the government to force pension schemes to withdraw pension clawback.
There’s an action group called Midland Clawback Campaign which has its own website. You can also find the Midland Clawback Campaign on Facebook (I’m afraid the link only works if you can log into Facebook as it’s a closed group). They’re also active on Twitter. (@midlandclawback1) They are campaigning to get HSBC to abolish the clawback that operates on one of the old Midland Bank pension schemes.
You can read the House of Commons Library report into pension clawback on the parliament website.
You can read about the legal challenge to pension clawback that went to the European Court of Justice, here .
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